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Security selection factors: novice versus experienced investors, The International Journal of Business and Finance Research 7(4): 115-126.
Our continuing research on factor based security selection models will address such issues including monthly returns for annually balanced portfolios that will provide additional risk etrics.
Specifically, they identify [summation]([w.sub.Pi]-[w.sub.Bi]) [r.sub.Bi] as a timing component (which technically is actually just asset allocation in one period), [summation] [w.sub.Bi] ([r.sub.pi]-[r.sub.Bi]) as a security selection component, and [summation] [w.sub.Pi] ([r.sub.Bi]-[w.sub.B] [r.sub.Pi]) as "other," where [r.sub.Bi] is the weight of the [i.sup.th] asset class and [r.sub.Bi] is its return for a passive portfolio, and [w.sub.Pi] and [r.sub.Pi] are similarly defined for the active portfolio.
The analysis attempts to explain relative under- or over-performance in terms of a managers' region, sector, style, or market-cap weightings, and security selection. In Morningstar Direct, users can benchmark performance to another fund, a custom or blended peer group, a Morningstar Category, or a selection from more than 30,000 indexes.
Lance Pan (Lpan@capitaladvisors.com) is Director of Research at Capital Advisors Group Inc., where he leads the fundamental credit research and individual security selection strategies.
Early studies frequently attempt to distinguish security selection versus market timing abilities on the part of fund managers.
A passive approach typically does not focus on individual security selection.
Students can be asked to base the management of the portfolio on specific criteria by speculating and hedging on hypothetical situations using theoretical tools including asset allocation and security selection.
In fact, according to the studies, security selection and market timing are far less important to a portfolio's performance compared to die overall asset allocation.
Among those diversified international funds, some managers may "actively" manage the portfolios by concentrating on selected securities, industry sectors, or regions, while some may follow more passive strategies by "indexing." It is obvious that in order to earn above-average returns, fund managers have to possess superior skills in security selection and market timing.
Greater than 90 percent of portfolio performance comes from portfolio design (asset allocation) while less than 10 percent of performance is derived from market timing and security selection.

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