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Evaluating Alternative Weighting Schemes for Stocks in a ‘Best Ideas’ Portfolio

The International Journal of Business and Finance Research, Vol. 4, No. 2, pp. 117-136, 2010

20 Pages Posted: 9 Sep 2010  

Lynda Livingston

University of Puget Sound - School of Business and Leadership

Date Written: 2010

Abstract

As institutional investors have become more aggressive in deploying their capital, fund managers have become more creative with their product offerings. In this paper, we consider a new institutional fund of mutual funds, a portfolio that combines the “best-idea” stocks from two underlying primary funds. The sponsor of this portfolio has chosen to weight all of the stocks equally, even those chosen by both of the underlying funds’ managers. However, stocks chosen by both managers may be more likely to outperform. We propose an alternative weighting scheme, where these “confirmed” stocks are weighted more heavily. We show that this overweighting strategy leads to a higher expected portfolio return than does the equally weighted scheme used by the sponsor.

Keywords: Funds-of-funds, Mutual Funds

JEL Classification: G11, G23

Suggested Citation

Livingston, Lynda, Evaluating Alternative Weighting Schemes for Stocks in a ‘Best Ideas’ Portfolio (2010). The International Journal of Business and Finance Research, Vol. 4, No. 2, pp. 117-136, 2010. Available at SSRN: https://ssrn.com/abstract=1667119

Lynda Livingston (Contact Author)

University of Puget Sound - School of Business and Leadership ( email )

1500 N Warner St.
Tacoma, WA 98416
United States

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