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The Journal of Portfolio Management

The Journal of Portfolio Management

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Primary Article

Portfolio Construction with Qualitative Forecasts

Ulf Herold
The Journal of Portfolio Management Fall 2003, 30 (1) 61-72; DOI: https://doi.org/10.3905/jpm.2003.319920
Ulf Herold
A senior member of Applied Research at Metzler Investment in Frankfurt, Germany.
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Abstract

The vast majority of active portfolio managers use a fundamental investment approach. They do not generate quantitative forecasts but instead express their market views in a qualitative manner. The portfolio construction approach in practice is usually purely ad hoc: overweighting assets with a bullish outlook by some prespecified amount, and underweighting assets for which the view is bearish. A structured approach for portfolio construction leads to a more consistent implementation of market views and to more balanced portfolios in terms of risk profile. This approach incorporates several diagnostic tools and a Bayesian model. It also allows a portfolio manager to compute the shrinkage in the information ratio when implementing a suboptimal portfolio. This mitigates the need for transactions and hence reduces transaction costs.

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The Journal of Portfolio Management
Vol. 30, Issue 1
Fall 2003
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Portfolio Construction with Qualitative Forecasts
Ulf Herold
The Journal of Portfolio Management Oct 2003, 30 (1) 61-72; DOI: 10.3905/jpm.2003.319920

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Portfolio Construction with Qualitative Forecasts
Ulf Herold
The Journal of Portfolio Management Oct 2003, 30 (1) 61-72; DOI: 10.3905/jpm.2003.319920
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