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On the benefits of active stock selection strategies for diversified investors

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  • Stadtmüller, Immo
  • Auer, Benjamin R.
  • Schuhmacher, Frank

Abstract

Motivated by the deteriorating standalone performance of popular active stock selection strategies, we investigate how they behave in a portfolio context. We show that investors holding portfolios diversified within and across asset classes via passive investment products cannot benefit from the addition of active products based on, for example, value, profitability and momentum effects. More specifically, the latter do not significantly improve out-of-sample Sharpe ratios. This result holds for both optimized portfolio weighting schemes (recently tilted towards bond markets) and heuristic fixed-weight approaches (with pronounced equity focus). It is also robust to a variety of modifications in our general research setup.

Suggested Citation

  • Stadtmüller, Immo & Auer, Benjamin R. & Schuhmacher, Frank, 2022. "On the benefits of active stock selection strategies for diversified investors," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 342-354.
    • Handle: RePEc:eee:quaeco:v:85:y:2022:i:c:p:342-354
    DOI: 10.1016/j.qref.2022.04.006
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    More about this item

    Keywords

    Active portfolio management; Passive investment; Mean-variance analysis; Covariance shrinkage; Volatility timing; Naive diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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