Role of the Equity Portfolio • Significant source of wealth today • Equities constitute differing proportions of average portfolio weights in different countries • One characteristic important to investors across markets is ability to be an inflation hedge – equities have comparatively high historical long-term rates of return – in study of 17 countries the long
Role of the Equity PortfolioSignificant source of wealth
todayEquities constitute differing proportions of average portfolio
weights in different countriesOne characteristic important to
investors across markets is ability to be an inflation
hedgeequities have comparatively high historical long-term rates of
returnin study of 17 countries the long term real rates of return
to equities exceeded that of bonds in all countriesPassive versus
Active ManagementPassive equity portfolio managementLong-term
buy-and-hold strategyUsually track an index over timeDesigned to
match market performanceManager is judged on how well they track
the target indexActive equity portfolio managementAttempts to
outperform a passive benchmark portfolio on a risk-adjusted basisAn
Overview of Passive Equity Portfolio Management StrategiesReplicate
the performance of an indexMay slightly underperform the target
index due to fees and commissionsCosts of active management (1 to 2
percent) are hard to overcome in risk-adjusted performanceMany
different market indexes are used for tracking portfoliosAn
Overview of Active Equity Portfolio Management StrategiesGoal is to
earn a portfolio return that exceeds the return of a passive
benchmark portfolio, net of transaction costs, on a risk-adjusted
basisPractical difficulties of active managerTransactions costs
must be offsetRisk can exceed passive benchmark
