Active vs Passive Management Strategies - Level III

Passive Strategies

• Such strategies assume that market expectations are correct.
• Portfolio is structured in a way to closely track the benchmark index.
• Portfolio manager deploying such strategies accept average risk and return level.

Active Strategies

• Primarily rely on manager's forecasting abilities.
• Returns of the portfolio must increase if manager has superior forecasting skills.

Types of Passive Management Strategies

1. Pure bond indexing/Full replications approach
2. Enhanced indexing by matching primary risk factor
3. Enhanced indexing by small factor mismatches

Types of Active Management Strategies

1. Active management by larger risk factor mismatches
2. Full blown active management

Key Terms - Level III

Usually when the word essay is used, the sketch which strikes the mind is more or less related to something detailed or a kind of a vignette. As per my understanding, so far, the morning section of Level III demands, to a considerable extent, the structured response which may comprise of terminologies which must be remembered. As I am in the initial phases of my preparation and going through fixed income section which has a fancy name in Level III as its associated with portfolio management, I am gradually realizing the importance of remembering they key terms. I mean we could have questions in which our desired response should only be those terms! For majority remembering and cramming the terms in late Feb or in start of March 2013 might be a suitable strategy but considering how I used to prepare in LI and LII - gradually, I think I should try to remember their names and try to connect them with the concepts to get comfortable with them.

Good Luck!