Benchmark portfolio strategies

Every investor has to develop a portfolio strategy which will best suit his investment objectives. Portfolio strategies can be either active or passive. Passive portfolio strategy (often known as a buy-and-hold strategy) does not require additional inputs, such as return forecasting. Its main investment objective is to follow the performance of the benchmark index [5]. Passive strategy is the purest implementation of the efficient market hypothesis (EMH) as it assumes that markets will be able to reflect all available information in the stock prices. 

The ability to construct portfolios that concentrate on a couple of key strategies where managers believe their skills lie, while remaining neutral to others is often the key to generating portfolio alpha. Beat the benchmark approach aids this process by forcing money managers to ask themselves a simple and important question before every transaction, Will this trade help me beat the benchmark ... 

Firstly, market weights for the benchmark have to be defined. This represents the efficient weights in cases when investors do not have specific views about the market. We use the so-called 7/AT strategy, which is also known as Equally weighted portfolio. This approach is set initial weights of our approach to 10% to reflect the 10 stock in the portfolio. 

Table 21.4 shows that the TRP strategy significantly outperformed the benchmark in relation to the Sharpe ratio and ROI. Although minimum variance was identified as the safest method, it achieved the lowest return per unit of risk between all five strategies. Benchmark passive investment and the EQW portfolio produced similar results. 

What approach is adopted by the active fond manager Portfolio managers employ four basic strategies to add value over and above the benchmark. We summarize these here ... 

---