The most popular exchange-traded fund (ETF) in the world, SPY, represents the largest 500 companies in the United States. In 2020, SPY had total returns of 18.35 percent, despite the economic slowdown created by COVID-19. Facebook, Apple, Amazon, Netflix, Google, and Microsoft contributed 10.8 percent of SPY’s 18.35 percent—over half of the index return. Simultaneously, 65 percent of SPY’s constituent stocks performed worse than the index; it was more probable for an investor to randomly pick a losing stock than a winning stock. This phenomenon is not unusual. The objective of this article is to understand the probability of randomly selecting a winning stock and how it may influence an investor’s choice to manage their portfolio actively, passively, or a blend of the two.
Author: Kathryn S. Berkow, PhD, is an assistant professor in the department of accounting & management information systems at the University of Delaware (UD) and senior researcher at high-performance algorithmic trading provider BestEx Research. In addition to undergraduate degrees from the University of Delaware, she holds a master’s degree and PhD in applied mathematics and statistics from Stony Brook University. She returned to UD from a career in financial services analytics, at ITG and Morgan Stanley in New York. At UD, she designs and teaches undergraduate and graduate courses in analytical decision making, both in person and online. Kathryn’s research focuses on statistical modeling of equities and futures market microstructure, aimed at improving institutional traders’ execution costs.
Author: Richard Jakotowicz, CFA, CFP, is the director of the financial planning and wealth management program at the University of Delaware. He is also the director of the Geltzeiler Trading Center and president of Benchmark Financial (an independent RIA). Richard has a master’s degree in finance, is a CFP professional, and a CFA charterholder. Prior to teaching at the University of Delaware, Richard held various positions within the J. P. Morgan Private Bank and TIAA-CREF with a focus on wealth and portfolio management.
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