U.S. Stock Portfolio

Paper Summary:

In this article, the writer provides an analysis of stock portfolio development. The writer offers examples of how to actively manage a U.S stock portfolio, what role allocation plays amongst different types of stocks in determining the returns, what role individual stock selection plays in determining returns and how to measure the performance of the manager. A discussion of the costs associated with such a strategy versus passive investment management is followed by a summary of the research and salient findings in the conclusion. The writer concludes that the research shows that the effective management of a given stock portfolio can be a daunting endeavor, but there are some alternatives available that can be used to help achieve the short and long-term goals of even the most ambitious investment plan, if certain strategies and techniques are consistently applied.

Outline:
Introduction
Review and Discussion
Background and Overview
Large versus Small Capitalization
Measuring the Performance of the Stock Portfolio Manager
Active versus Passive Management
Conclusion

From the Paper:

"These authors add that the rate of return from a portfolio consisting of small-capitalization companies was outstanding. For instance, $1 invested in a small-capitalization portfolio for the period 1963-84 increased to more than $115; during the same period, a stock portfolio comprised of companies with the largest average capitalization increased to just $6. Superior results were found to exist at each size gradation. In general, the smaller the firms in a portfolio, the better it performed. While the superior performance of the size effect is not guaranteed, it was present in 17 out of 22 years of studies; therefore, the size effect should be considered an important part of an overall investment strategy. These findings are supported by an analysis of the number of AMEX or NYSE listed firms in the bottom quintile of market capitalization and cutoff market capitalization value, as shown in Tables 1 and 2 and Figures 1 and 2 below."

Sample of Sources Used:

• Album, A. (1999, January). Investment choices and stock selections. The Middle East, 286, 21.
• Bogle, J. C. (1999). Common sense on mutual funds: New imperatives for the intelligent investor. New York: Wiley.
• Canto, V. A., Laffer, A. B., & Webb, R. I. (1992). Investment strategy and state and local economic policy. Westport, CT: Quorum Books.
• Davenport, D. A. (1990). The equity manager search: Strategies and techniques for plan sponsors. New York: Quorum Books.
• Duffy, M. N. (2001). Lessons of a bear market. Journal of Accountancy, 192(2), 20.

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