RT Journal Article
SR Electronic
T1 Portfolio Construction with Qualitative Forecasts
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 61
OP 72
DO 10.3905/jpm.2003.319920
VO 30
IS 1
A1 Ulf Herold
YR 2003
UL https://pm-research.com/content/30/1/61.abstract
AB The vast majority of active portfolio managers use a fundamental investment approach. They do not generate quantitative forecasts but instead express their market views in a qualitative manner. The portfolio construction approach in practice is usually purely ad hoc: overweighting assets with a bullish outlook by some prespecified amount, and underweighting assets for which the view is bearish. A structured approach for portfolio construction leads to a more consistent implementation of market views and to more balanced portfolios in terms of risk profile. This approach incorporates several diagnostic tools and a Bayesian model. It also allows a portfolio manager to compute the shrinkage in the information ratio when implementing a suboptimal portfolio. This mitigates the need for transactions and hence reduces transaction costs.