Active Vs. Passive Investment in The Post-Pandemic U.S. Stock Market: A Sharpe Ratio-Based Portfolio Optimization Compared to the S&P 500

Abstract

As the world economy gradually recovers from the pandemic, forming an optimal portfolio to generate excess return while reducing risk is getting more priority from investors. Supply chain bottleneck, inflationary pressure and structural transformation all significantly impacted the equity market, creating both risks and opportunities. In this era of change and uncertainty, the US stock market remains a global focal point for many investors due to its large market capitalization and liquidity. This paper focuses on the US stock market, and selected five leaders from different industries, Technology, Finance, Energy, Retail and Health, for portfolio analysis, with specific focus from 2021 onwards. They will be formed into a portfolio that maximizes the Sharpe ratio generated and compared against the market benchmark. The result showed this actively formed portfolio will generate 19.411% cumulative return, exceeding S&P 500’s 0.474%. Sharpe ratio calculated would be 10.27, offering enormous returns to per unit of additional risk taken. This result would provide insights to investors who are indecisive between active or passive investment strategy.