Actively Managed Mean-Variance Portfolios

Forthcoming, Journal of Wealth Management

13 Pages Posted: 25 Feb 2020

See all articles by Paskalis Glabadanidis

Paskalis Glabadanidis

Essential Services Commission of South Australia

Date Written: October 12, 2019

Abstract

I present closed-form analytical solutions to the active mean-variance portfolio management problem relative to a pre-specified benchmark subject to a budget constraint and a beta constraint. The imposition of the beta constraint makes the benchmark relevant to the portfolio problem. I provide an intuitive interpretation of the optimal active portfolio in the general mean-variance case as well as a detailed expression for the optimal weights when returns follow a single-factor model. I show that the value-added of active portfolio management is simply the incremental certainty equivalent return of the active portfolio relative to the certainty equivalent return of the benchmark. I investigate the out-of-sample performance of the optimal active mean-variance portfolio using industry portfolios as well as individual stocks.

Keywords: active portfolio management, benchmark, mean-variance portfolio, tracking error, replicating portfolio

JEL Classification: G11, G10

Suggested Citation

Glabadanidis, Paskalis, Actively Managed Mean-Variance Portfolios (October 12, 2019). Forthcoming, Journal of Wealth Management, Available at SSRN: https://ssrn.com/abstract=3527189

Paskalis Glabadanidis (Contact Author)

Essential Services Commission of South Australia ( email )

Level 1, 151 Pirie Street
Adelaide, SA 5001
Australia

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