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.
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Forecasts for risks and returns must be made in order to design the individual investor's optimal portfolio.
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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.
