Is Three A Crowd? Considering The Value Of Manager Diversification For Adding Alpha
International Journal Of Business & Finance Research (ijbfr)
Business and Leadership
Creating a portfolio that consistently generates alpha--market-adjusted abnormal returns--is the holy grail of active management. Given that excess returns can come both from manager skill and from luck, some advocates of active management suggest that active finds should be combined into diversified portfolios, eliminating all but "pure" active risk and thereby optimizing the risk/return trade-off. In this paper, we present a simple model of such a diversified portfolio, and show that under certain conditions a portfolio manager actually would be better off by not diversifying.
Livingston, Lynda S.. 2008. "Is Three a Crowd? Considering the Value of Manager Diversification for Adding Alpha." International Journal Of Business & Finance Research (ijbfr) 2(2): 45-62.