ABSTRACT
The cornerstones of quantitative portfolio management are prediction of asset returns from a large pool of investment possibilities, risk estimation, and portfolio optimization. There are two main styles of portfolio management – passive and active. Passive portfolio management constructs and administers portfolios that mimic the return of some given index. Passive portfolio management attempts to track the index, while active portfolio managers try to outperform it. An active portfolio manager is rewarded for generating additional return relative to the benchmark, and penalized for subpar return or for adding excess volatility relative to the benchmark. Alpha generation is a key component of active portfolio management to add value. Active portfolio management clearly outperforms the passive approach in the absence of transaction costs, but the advantage may be outweighed by the transaction costs incurred in purchase and sale of the assets constituting the portfolio.
