Download This PaperArithmetic of Active Management Revisited
8 Pages Posted: 6 Apr 2022
Date Written: March 15, 2022
Abstract
In this paper we revisit Sharpe’s (1991) arithmetic of active management. With no transaction costs, we confirm in a 3x3 model with three stock categories and three investor groups (market trackers, smart money, and dumb money) that jointly the active smart and dumb groups cannot beat the market. However, with the right strategy a large share of dumb money may join the smart money and outperform the market. We recommend such a strategy.
Keywords: Passive vs. active management; Portfolio theory; ETFs; Investment performance; Finance Theory.
JEL Classification: G30, G35, B24, O16
Suggested Citation: Suggested Citation
Mendes, António Marques, Arithmetic of Active Management Revisited (March 15, 2022). Available at SSRN: https://ssrn.com/abstract=4058517 or http://dx.doi.org/10.2139/ssrn.4058517
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