Active Portfolio Management on the Romanian Stock Market

Abstract

The homogeneity of expectations and rationality of decisions in the neo-classical portfolio theory imply the existence of an efficient market – meaning a market where assets’ prices coincide with their fundamental value. The efficient market hypothesis, stating that efforts to find over/under valued assets are unnecessary and will not produce results superior to a passive strategy, is clearly contrary to the active portfolio management strategy and its proponents sustain that investing in a tracking portfolio (that is a portfolio that closely tracks a composite stock index) will bring the maximum possible return. In this research we aim to assess the individual Romanian portfolios performance (real individual investment accounts on Bucharest Stock Exchange) in comparison with the international stock markets’ evolution (proxied by the multinational equity index MSCI World Index) and also with the overall evolution of the Romanian Stock Market (proxied by its composite index BET-C). We construct a so-called “Individual Portfolios Index” or IPI from the average daily returns weighted with the market value for 30 real individual portfolios. The comparative analysis reveals that the most efficient portfolio is the one tracking the multinational MSCI World Index, and also that IPI has a slightly lower risk and return than the Romanian composite index. Next, we evaluate the risk-adjusted portfolio performance for the index IPI, the composite Romanian index BET-C, and for each of the 30 individual accounts. We conclude that the overall value of an active portfolio management strategy on the Romanian equity market is inferior to the value of a passive strategy tracking the market index over the analyzed period.