Active Portfolio Management using Factor Analysis Model Dr. Krishnan Kalpakam Gopala*, Dr. Arekar Kirti** *Associate Professor, K J Somaiya Institute of Management Studies and Research, Mumbai, India **Associate Professor, K J Somaiya Institute of Management Studies and Research, Mumbai, India Online published on 12 May, 2017. Abstract There are various approaches to portfolio management, but the ultimate objective of them all is to maximize the returns with minimum risk. In an increasingly efficient market place, the role of a fund manager has become challenging. As investors become more aware of the market fundamentals, the expectations are more than ever for the fund manager to perform and beat the market. Using advanced quantitative method, Performance Attribution is a technique by which active returns of each security in a portfolio is broken down among various factors with an objective of better analysis of risk and returns. This analysis seeks to answer the major sources of value addition. This paper evaluates the return generating process for the Indian stock market implied by general multi-factor model and the Fama-French three-factor model in specific. It tests systematically and robustly, using a large sample data pooled from wide range of companies (Nifty, Nifty midcap and Nifty Next stocks) and periods, the relevance of Fama-French three-factor model in explaining the cross sectional differences in returns in Indian stock market,. Thus, it provides an evidence of the pervasiveness of the Fama-French three-factor model in explaining the cross sectional differences of stock returns. We find that for portfolios consisting of NIFTY and NIFTY Next 50 stocks, the best approach is to build portfolios according to P/B whereas in case of NIFTY Mid Cap portfolio it is advisable to build a portfolio as per yield. This study may provide a strong support for a broader and generalized asset pricing model having multiple risk factors. Top Keywords Multi-Factor Model, Asset Pricing, Size effect, Value effect. Top |