A New Paradigm for Today’s Challanges (1 of 3)
Jul 4th, 2006 | Filed under: CAPM / Alpha Theory, Portable Alpha & Alpha/Beta SeparationBy: Bob Litterman, Goldman Sachs
Published: 2003
Excerpts:
“In today’s financial markets, there are certain realities institutional investors must confront. The equity markets have disappointed over the past three years and interest rates have reached nearly 50-year lows. The implications of this dilemma on plan sponsors are twofold: forward-looking return assumptions are too high and most plans are underfunded – some seriously.”
“Given this environment, many investors are seeking new solutions. We believe our Active Alpha Investing approach may provide some answers. Simply stated, it is an enhancement of traditional portfolio theory. The core concept is to attempt to disaggregate sources of portfolio risk to identify additional return opportunities. It is a process that seeks to identify how to optimally deploy risk – to either improve returns at a stated level of risk, or reduce risk at a target level of returns. In a series of three articles, we’ll illuminate Active Alpha Investing by highlighting the value of separating sources of risk, helping you identify uncorrelated sources of return, and providing a framework for putting an improved long-term investment plan into action.”
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