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Active Portfolio Management and Positive Alphas: Fact or Fantasy?

Robert A. Jarrow
The Journal of Portfolio Management Summer 2010, 36 (4) 17-22; DOI: https://doi.org/10.3905/jpm.2010.36.4.017
Robert A. Jarrow
is the Ronald P. and Susan E. Lynch Professor of Investment Management at the Johnson Graduate School of Management, Cornell University in Ithaca, NY.
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  • For correspondence: raj15@cornell.edu
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Abstract

It is commonly believed that active portfolio management can generate positive alphas.This is partly based on the belief that positive alphas represent disequilibrium returns, which can exist in complex financial markets.In contradiction, this article shows that positive alphas represent arbitrage opportunities, not just disequilibrium returns.As persistent and frequent arbitrage opportunities are much rarer, even in complex markets, Jarrow argues that positive alphas are more fantasy than fact. He introduces the notion of an unobservable factor that can generate false positive alphas, and which resolves the inconsistency between common belief and the sparsity of positive alphas.

TOPICS: Portfolio management/multi-asset allocation, security analysis and valuation

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The Journal of Portfolio Management: 36 (4)
The Journal of Portfolio Management
Vol. 36, Issue 4
Summer 2010
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Active Portfolio Management and Positive Alphas: Fact or Fantasy?
Robert A. Jarrow
The Journal of Portfolio Management Jul 2010, 36 (4) 17-22; DOI: 10.3905/jpm.2010.36.4.017

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Active Portfolio Management and Positive Alphas: Fact or Fantasy?
Robert A. Jarrow
The Journal of Portfolio Management Jul 2010, 36 (4) 17-22; DOI: 10.3905/jpm.2010.36.4.017
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  • Article
    • Abstract
    • THE K-FACTOR RETURN MODEL
    • ACTIVE PORTFOLIO MANAGEMENT
    • FALSE POSITIVE ALPHAS
    • CASE STUDIES
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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