An Optimal Investment Portfolio : A strategic investment plan combining active and passive management approaches to investing.

Abstract

When building an equity portfolio to maximize growth, stability, and security of personal wealth, a hybrid investment plan with both active and passive strategies is the most optimal approach. Both approaches have their strengths and weaknesses. Thus, careful deliberation of both must be taken to incorporate the positives of both into one portfolio to maximize the return for the given risk level of the portfolio. Active management must be prominent when investing in industry concentrated securities/indexes, since it works best in less broad, inefficient markets because a competitive advantage can be gained with specific knowledge and expertise in such markets. Passive management must be prominent when investing in broad, efficient markets because these market benchmarks can't be beat, and passive management seeks to match the market benchmark. Also, passive strategies have very low costs and portfolio turnovers. When done appropriately, a hybrid investment plan can be very beneficial for personal wealth. This study will examine both the positive and negative components of both active and passive management. It will measure and analyze the performances of investing in industry concentrated securities/indexes, as well as their fees and taxes. Also, this study will measure and analyze the performance of various equity indexes, as well as their fees and taxes. Additionally, this study will examine how active and passive portfolio management incorporate some base investment theories, such as modern portfolio theory and efficient market hypothesis, and their principles, such as diversification and risk measurement. Also included are various charts and tables.