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Is Three A Crowd? Considering The Value Of Manager Diversification For Adding Alpha

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  • Lynda S. Livingston

Abstract

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 funds 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.

Suggested Citation

  • Lynda S. Livingston, 2008. "Is Three A Crowd? Considering The Value Of Manager Diversification For Adding Alpha," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 2(2), pages 45-62.
  • Handle: RePEc:ibf:ijbfre:v:2:y:2008:i:2:p:45-62
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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