“Long Only portfolio - Being unable to fully exploit a negative forecast also limits the ability of the Portfolio manager to maximize positive forecasts.” Can anyone explain this statement ? Finding it a bit vague… Thanks…
If you can only go long, you can only go 100% in a stock. If you can go long/short, you can go 150% of your portfolio in a stock and short 50% of another stock. Your net position is 100%
Not sure, but the proceeds from short sales can often be used to purchase more long assets, so perhaps this limits the degree to which one can go long. Also, if you are limited in your expected tracking error, having negatively correlated assets (b/c short assets have negatively correlated market risk) would mean that you can take larger bets on the long side.
If you believe/know so sure you got a winner, you want to bet the farm…however, with a long-only port, the max you have is only 100%. So you are limited on your positive bets up to 100%. However, if you can short, then your positive bets size can increase beyond 100%. Make sense??
“Long Only portfolio - Being unable to fully exploit a negative forecast” - with an unconstrained or Long/Short portfolio you could Short those stocks with a negative forecast and hopefully pick up some alpha “also limits the ability of the Portfolio manager to maximize positive forecasts.” - If I short stocks I can use the proceeds to buy more stocks (Long) and hopefully pick up some additional alpha via overweighting a certain stock. If you feel that GE is going to outperform then you are going to want to increase your portfolio weighting to GE.
If you are long only, can’t exploit your negative forecast. All you can do is sell the shares if you have them. With short mixed in, you can short the negative forecast stock/index/asset class, and therefore profit from your negative forecast (assuming your forecast is correct, at least directionally, if not in magnitude)
Thanks so much all of you… It makes more sense now!