Pynnonen, Seppo (1997). Short term volatility changes and active portfolio strategies. In The Yearbook of the Finnish Statistical Society, 235--244. Hakapaino Oy, Helsinki.

In this paper the more traditional active portfolio management discussed in Treynor and Black (1973), Rosenberg (1979), Rudd and Clasing (1982), and Pynnönen (1995) is extended to utilize the changing volatility in addition to the predicted short term residual returns. It is shown that taking this new aspect into account enables investors to perform a more detailed analysis of the sources of required return that should be gained by active portfolio management. Furthermore, the approach enables investors to predict future end period volatility in the investment horizon on the basis of current information. In this paper the necessary formulas are derived for practical portfolio analysis. In addition, in contrast to the above papers, the possible change in the market position is taken explicitly into account, and its impact on active management is included in the analysis. This situation becomes relevant when short selling is not allowed.