Active Portfolio Management Portfolio Construction: Implementing an Investment Strategy

Johan Christian Hilsted

Student thesis: Master thesis


This thesis aims at creating an investment strategy for active portfolio management to outperform the MSCI Denmark from 1992 to 2011. The index development of the Danish stock market has been quite impressive as it has performed remarkably better than other national indices. It is therefore interesting to investigate whether active portfolio management constitutes a winning strategy superior to investing in the MSCI Denmark. There is no generally accepted approach to conduct active portfolio management. This thesis approaches the subject by comparing two internationally diversified portfolios to the MSCI Denmark as benchmark - one portfolio submitted to a 20% maximum asset representation restriction, the other portfolio left unrestricted. From investment strategy we conclude that combining strategic and tactical asset allocation constitutes an appropriate investment strategy for active portfolio management, as it limits the long-term portfolio investment opportunities and allows for short-term portfolio repositioning. The information ratio constitutes the performance measure of active portfolio management, as it optimizes portfolio construction by comparing expected returns of portfolio and benchmark – the residual return. The Capital Assets Pricing Model (CAPM) was utilized for return estimations for both investment opportunities and benchmark. Mean-variance portfolio construction was conducted based upon investment opportunities expected to outperform the benchmark. The MSCI Denmark provides realized average monthly return of 0,65%, while the actively managed portfolios produce average realized monthly return of 0,34% and 0,37%, respectively. In that regard, active portfolio management has not outperformed the benchmark, and statistical findings cannot suggest portfolio timing skill. However, considering the systematic risk adjusted return, both portfolios yield significant alpha, or value added, with the unrestricted portfolio being the best performing portfolio. In conclusion, active portfolio management cannot produce higher return than the MSCI Denmark, but has proven to benefit the investor, as the market risk exposure justifies both inferior and superior portfolio return to the benchmark.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2012
Number of pages118