Portfolio management in the binomial model: Conditions for outperforming benchmarks

Portfolio management in the binomial model: Conditions for outperforming benchmarks

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Article ID: iaor20041049
Country: Germany
Volume: 25
Issue: 1
Start Page Number: 61
End Page Number: 84
Publication Date: Jan 2003
Journal: OR Spektrum
Authors:
Keywords: portfolio management
Abstract:

The performance of a portfolio manager is in practice usually measured by the result of his trading strategy compared to a benchmark. Therefore the information whether there exists a strategy that allows to outperform the benchmark is of high value for an active investor. The article shows how this information can be generated in the binomial model. In this context the connection between trading strategies and the investor's expectations concerning future asset prices is analyzed. Based on these findings several conditions are derived that allow the portfolio manager to judge whether the benchmark can be outperformed by an active trading strategy.

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