Ex post reality versus ex ante theory of the fundamental law of active management

David J Buckle ()
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David J Buckle: Merrill Lynch Investment Managers

Journal of Asset Management, 2005, vol. 6, issue 1, No 3, 32 pages

Abstract: Abstract The fundamental law of active management provides considerable ex ante aid both to those constructing active management processes and to those estimating the future performance of those processes. Ex post, performance can be quite different to that expected by the law, and the violations of assumptions underlying the law which cause the greatest performance impact are identified. It is shown that biased forecasting in a trending market is the greatest cause for concern. Portfolio construction is also a sensitive input in certain circumstances. The remaining assumptions underlying the law are surprisingly innocuous, and violations have very little impact on performance.

Keywords: active portfolio management; fundamental law of active management; information ratio (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1057/palgrave.jam.2240163

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