PORTFOLIO CONSTRUCTION AND MANAGEMENT DURING THE PERIOD OF FINANCIAL CRISIS
Keywords:portfolio construction, management, financial bubbles, optimal portfolio
Return-based style analysis provides a way of identifying the asset mix of the fund manager or an investor and comparing it with the asset mix of the performance benchmark. This enables the plan sponsor to understand the nature of the style and selection bets taken by an active manager. The correlation structure among the type of bets taken by different active managers provides a plan sponsor or an individual investor with valuable insights regarding the extent to which the bets cancel or reinforce each other.
The decomposition of a managed portfolio return into two components, style and selection, provides a natural distinction between “active” and “passive” managers. An “active” manager is looking for ways to improve performance by investing in asset classes as well as individual securities within each asset classes that she considers under priced.
Financial bubbles remain a challenge for economic theory. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly controlled experimental markets, even when uncertainty is eliminated and calculating the expected returns should be a simple statistical exercise. Theoreticians have suggested that bubbles are rational, intrinsic, and contagious, but there is no widely accepted theory to explain their occurrence. So to predict them is quite difficult. But investors can minimise their looses using optimal portfolio theory and paying more attention to portfolio diversification.