McGraw-Hill

234 Manaeine Portfolios
of investment management that arises when stock selection and
portfolio construction take a fragmented rather than a holistic approach
to the equity market.
The lead article in the Spring 1996 issue of the Journal of Portfolio
Management, "Residual Risk How Much Is Too Much?" considers
the impacts of investor risk tolerance and manager skill' on
portfolio selection. It demonstrates that portfolios that artificially
constrain risk can end up sacrificing return needlessly.
"High-Definition Style Rotation" (Journal of Investing, Fall
1996) examines a portfolio construction approach that is not tied to
an underlying market benchmark, but is designed rather to exploit
model insights into how payoffs to variables change over different
market and economic environments. This chapter looks back to Part
1, in emphasizing the return-enhancement potential of disentangling
equity returns, and anticipates Part 3, in providing an example
of aportfoliothat is engineered along other than strict
benchmark lines.