University of Twente Student Theses
Concentrated Equity Portfolios for Pension Funds : Evaluating Concentrated Portfolio Approaches Based on Modeled Client Satisfaction and Expected Excess Yield
Mots, André de (2024) Concentrated Equity Portfolios for Pension Funds : Evaluating Concentrated Portfolio Approaches Based on Modeled Client Satisfaction and Expected Excess Yield.
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| Abstract: | This research examines the feasibility and performance of concentrated equity portfolios for pension funds, focusing on client dissatisfaction risk and excess return. Concentrated portfolios, which consist of a limited number of securities, offer an alternative to widely diversified portfolios and may align with the investment philosophies of pension funds. This study aims to test its feasibility and to develop a comprehensive framework for constructing and managing such portfolios, using the S&P 500 index as a benchmark. The research evaluates various asset price path generating models, portfolio selection and capital allocation strategies. Methodologies employed include computational simulations using models based on a Geometric Brownian Motion, historical data and the Capital Asset Pricing Model (CAPM). Next to that, a novel risk measure framework is developed that accounts for investor satisfaction, where the investment is assumed to be terminated after a memory-adjusted cumulative underperformance of five percent. The findings indicate that while well designed concentrated portfolios yield higher excess returns than passive benchmarks, they also exhibit substantially high risk of client dissatisfaction, reducing their overall appeal for pension funds enormously. When pursuing concentrated investing, pension funds should maintain at least forty assets, with both asset selection and capital distribution based on market capitalization. |
| Item Type: | Essay (Master) |
| Clients: | Cardano Risk Management B.V., Rotterdam, Netherlands |
| Faculty: | BMS: Behavioural, Management and Social Sciences |
| Subject: | 30 exact sciences in general, 31 mathematics, 83 economics |
| Programme: | Industrial Engineering and Management MSc (60029) |
| Link to this item: | https://purl.utwente.nl/essays/104558 |
| Export this item as: | BibTeX EndNote HTML Citation Reference Manager |
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