Handbook of Finance: Investment Management and Financial Management

Chapter 24. Overview of Active Common Stock Portfolio Strategies

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

SERGIO M. FOCARDI

Partner, Intertek Group

PETTER N. KOLM, PhD

Clinical Associate Professor and Deputy Director of the Mathematics in Finance M.S. Program, Courant Institute, New York University

ROBERT R. JOHNSON, PhD, CFA

Deputy Chief Executive Officer, CFA Institute

Abstract: Common stock portfolio strategies can be classified as active and passive. The selection of a strategy depends on the risk tolerance of the investor and the investor's view of the efficiency of the stock market. Investors who believe the stock market is efficient would tend to favor a passive strategy such as indexing; investors who believe the stock market is inefficient will embrace an active strategy. There are numerous types of active strategies pursued by investors in the stock market. Among these, equity style management, the attempt to identify groups of stocks that are mispriced relative to the rest of the market, has become a popular active strategy.

Keywords: active strategy, passive strategy, indexing, top-down approach, bottom-up approach, fundamental security analysis, technical analysis, earnings surprises, low price-earnings ratio (P/E), market-neutral long-short strategy, market anomaly strategies, small-firm effect, low P/E effect, neglected-firm effect, calendar anomalies, insider activity, market efficiency, equity styles, growth stocks, ...