Portfolio Revision: A Turnover-Constrained Approach

Abstract

This article presents a new approach to portfolio revision that attempts to build a bridge between the portfolio selection models of academicians and the work of practicing portfolio managers. Portfolio management is a broad activity which may involve more finance professionals than is frequently realized. It is surely the major activity of a fund manager; in addition, it is often a significant activity of corporate chief financial officers and their staffs. For example, it is usually desirable to maintain among divisions of the firm and among capital investment projects a portfolio balance not unlike that maintained by a fund manager among security investments. In addition, the chief financial officer is frequently responsible for the firm's investment portfolios, as well as for its pension and profit-sharing funds. On the side, he may be a college endowment fund trustee or a mutual fund director. All these activities involve updating, or revising, existing portfolios to adjust for changing conditions and new information. The pioneering work of Markowitz and the succeeding developments of most other researchers apply, for the most part, to the more basic task of portfolio selection, which is the determination of a group of securities for initial investment. The related but broader process of portfolio revision has developed slowly. This is felt to be one of two major bottlenecks currently impeding progress and implementation of scientific portfolio management. (The other is the slow development of a comfortable interface between security analysts and portfolio analysts, whereby the former produce statistical estimates of the future performance of individual securities and of the market for use in models of the latter.)