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