On the benefits of active stock selection strategies for diversified investors

Immo Stadtmüller, Benjamin R. Auer and Frank Schuhmacher

The Quarterly Review of Economics and Finance, 2022, vol. 85, issue C, 342-354

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.

Keywords: Active portfolio management; Passive investment; Mean-variance analysis; Covariance shrinkage; Volatility timing; Naive diversification (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:85:y:2022:i:c:p:342-354

DOI: 10.1016/j.qref.2022.04.006

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