Active Portfolio Selection Theory Applied Research, In The A-share Market

The theory of active portfolio management was established by Grinold in the late 1980s. As the quantitative investment strategies become more and more sophisticated, active portfolio management, which is an important strategy for quantitative investors, has now been widely used in the United States, Europe and other developed markets. With the development of China's financial market, conditions for establishing absolute return funds and quantitative investing funds are favorable now, and active portfolio management is going to have a far-reaching influence on the investment philosophy of China's institutional investors.This paper discussed the application of active portfolio management in China's financial market in two aspects:the optimal active portfolio construction and forecasting of return and risk. First we set up the single-period and multi-period models of active portfolio choice, and solved the problems using approaches which are originally used in the modern portfolio theory. We also discussed market timing and stock picking, which are the two sources of active return. Then we introduced several forecasting methods, such as linear regression, cash flow indicators and variations in the portfolio of closed-end funds. We established active investment strategies based on these forecasts and back tested the strategies using China's market data. The results show that in most cases active investment strategies can beat the market average with positive active return. For portfolio managers who seek absolute return, one potential strategy is to simply long the market index during the bull market and apply the alpha-beta separation strategy when the market is bearish or fluctuating with no trends.The results of this paper can be help to the product innovation in the asset management industry in China. Traditional portfolio management is no longer applicable to sector funds, absolute return funds and other innovative products. It is crucial for those innovative institutional investors to set up a systematic process involving asset allocation, portfolio construction, risk management and performance evaluation based on active investing. We hope the portfolio choice rules and forecasting methods established in this paper will contribute to the product innovation in the future.