Quote:
Originally Posted by pelagius
We know the answer to this empirically. Its has been looked at extensively in the finance literature. Once we adjust for risk or style, Jay's strategy does a little better on average. A funds past performance has almost no predictive power for future performance (see, for example, Carhart's 1997 Journal of Finance article that examines something very close to this question). Thus ex ante, our best estimate of how funds that performed the best in the past will perform going forward is the following: after controlling for risk they will do little better than a passive allocation before costs and slightly worse after costs.
Second Jay's breakdown, while sensible, is not necessarily an implication of portfolio theory. Its consistent with portfolio theory, but active management can be consistent with portfolio theory. Jay's view essentially adds an assumption called complete agreement and an assumption about market efficiency to get to portfolio allocation recomendation.
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Finance literature probably written by academians (sp). Anyway, it has been a fun discussion. May everyone make a lot of money using their favorite method.