Evaluating Alternative Weighting Schemes for Stocks in a ‘Best Ideas’ Portfolio
University of Puget Sound - School of Business and Leadership
The International Journal of Business and Finance Research, Vol. 4, No. 2, pp. 117-136, 2010
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.
Number of Pages in PDF File: 20
Keywords: Funds-of-funds, Mutual Funds
JEL Classification: G11, G23
Date posted: September 9, 2010