Submission Date

2004

Document Type

Paper

Department

Business & Economics

Adviser

Andrew Economopoulos

Committee Member

Cindy Harris

Committee Member

Peyton Ferrier

Committee Member

Joseph Melrose

Department Chair

Cindy Harris

Project Description

Portfolio managers are charged with maximizing returns for a given level of risk. There are practical problems that arise in creating an efficient portfolio and maintaining a target level of risk and return. This paper will identify two important factors that a manager needs to address in creating and managing a portfolio. The first step in creating a portfolio should be the establishment of the structure of the portfolio or the portfolio policy, what asset classes it holds and in what proportions. The structure of the portfolio is the main factor that shows how a portfolio is exposed to risk. A second important factor is the strategy employed by the manager to manage the portfolio. A manager can choose to employ a buy and hold strategy or he/she can take a more active role by employing some form of a rebalancing strategy. The portion of return generated by employing a particular strategy will be attributed to active management. We build a regression model that will answer the question: what percent of the total return is explained by the portfolio policy vs. active management?

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