CHAPTER 8Equity Portfolio Construction
Chapter Outline
8.1 INTRODUCTION
Equity managers buy and sell stocks. They may trade them in bulk or one by one. They may buy them—initiating new positions or adding to existing positions—for their dividend yield, potential price appreciation, or diversifying characteristics. They may sell them to initiate short positions or reduce existing positions, in anticipation of price depreciation, or to hedge. Although stocks come in different forms, this chapter focuses on managing common stock portfolios; yet its content applies to a broad range of strategies.1
Chapter 7 discussed selecting the appropriate mix for a diversified blend of equity funds. This chapter moves to the next level of detail, taking the point of view of the manager of an individual equity portfolio. The objective for this chapter is to guide managers in the most appropriate methods for building portfolios, given their objectives, skills, and investment opportunities. It will be useful for the general investor as well. It explains the construction process and in turn how individual equity accounts impact the profile of the overall equity exposure.
This chapter builds on terminology, concepts, and applications introduced ...