The arithmetic mean-variance frontier shows that taking more risk is always rewarded with higher expected arithmetic return. This article shows that there is a danger from being too aggressive that is not reflected in the arithmetic return mean-variance frontier because expected arithmetic...

Ideally, an index fund should provide the best possible tradeoff between expected return and risk for the investor who has no research advantage. A number of practical problems arise, however, when one attempts to translate this ideal into practice. Even in the absence of a research advantage, a...

An idealized model of the investment process redefines the respective roles of security analysts and portfolio managers, quantifies such concepts as activity and aggressiveness, and explains how the individual analyst's efforts at forecasting returns translate into improved portfolio performance

The arithmetic mean-variance efficient frontier shows that taking more risk is always rewarded with higher expected arithmetic return. However, expected arithmetic return is a poor indicator of long-term arithmetic return, which corresponds to expected continuous return. For the continuous...

A widespread concern in the investment industry is whether commonly used investment management fee arrangements encourage investment managers to act in their clients' interests. The value to managers of a one-period call performance fee is maximized by maximizing performance volatility. This is...

The source of investment performance is estimation error.Estimation error leads investors to believe securities are mispriced when they are not. They respond by undiversifying to increase their portfolios' estimated expected return. Since they are responding to estimation error, their actual...