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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ID="*" Thomas Balzer now works in the Risk Measurement & Management Department of Credit Suisse First Boston in London. The views expressed in this article are those of the author, and do not necessarily represent those of Credit Suisse Group or Credit Suisse First Boston. The author thanks Dr. Michael Olbrich for careful reading and several useful comments.
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Balzer, T. Portfolio management in the binomial model: conditions for outperforming benchmarks. OR Spectrum 25, 61–84 (2003). https://doi.org/10.1007/s00291-002-0110-6
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DOI: https://doi.org/10.1007/s00291-002-0110-6