Page 45 - FINAL CFA SLIDES DECEMBER 2018 DAY 12

Session Unit 12:
41. Portfolio Risk and Return: Part II

2 ssues on active portfolio management:

1. Zero Net Active Risk – This happens when multiple managers use the same benchmark for the
same asset class (or significant benchmark overlap): 2 effects:
• Active management risk arises as some overweighing and some under-weighing the same
stock, but net effect is zero!

2. Trading may become excessive, overall resulting in negative tax consequences, specifically
potentially higher capital gains taxes, compared to an overall efficient tax strategy.

tanties

Solution - core-satellite approach:

Invest the majority, or core, portion of the portfolio in passively managed indexes and a
smaller, or satellite, portion in active strategies. This reduces the likelihood of excessive
trading and offsetting active positions.

• Success of Security Selection and Tactical Asset Allocation depends on the manager’s

skill ability to identify and the opportunities (mis-pricings or inefficiencies) within a
particular asset class.