Lesson 26 of 29
Justifying Active Portfolio Management
- Two arguments can be used to justify active portfolio management for investors:
- Given that the mispricing of securities takes place from time to time (2007 would have been a great time to short U.S. mortgage backed securities), highly skilled active managers can exploit mispricings to generate excess returns.
- Even with a passive strategy, an allocation decision must be made between the risk free asset (such as government debt) and a portfolio comprised of risky assets.
-
Forecasts for risks and returns must be made in order to design the individual investor's optimal portfolio.
-
Successful limited active management can be highly beneficial for investors as periodic allocation weighting adjustments can facilitate higher returns during economic expansion and mitigate losses during economic contraction.
Test Your Knowledge
Check your understanding of this lesson with a short quiz.