Skill and Profit in Active Management

47 Pages Posted: 1 Jul 2019 Last revised: 12 Feb 2023

See all articles by Robert F. Stambaugh

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

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Date Written: June 2019


I analyze skill’s role in active management under general equilibrium with many assets and costly trading. More-skilled managers produce larger expected total investment profits, and their portfolio weights correlate more highly with assets’ future returns. Becoming more skilled, however, can reduce a manager’s expected profit if enough other managers also become more skilled. The greater skill allows those managers to identify profit opportunities more accurately, but active management in aggregate then corrects prices more, shrinking the profits those opportunities offer. The latter effect can dominate in a setting consistent with numerous empirical properties of active management and stock returns.

Suggested Citation

Stambaugh, Robert F., Skill and Profit in Active Management (June 2019). NBER Working Paper No. w26027, Available at SSRN:

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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