Five Myths of Active Portfolio Management

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Abstract
Five myths are debunked here. It is not true that: the return investors earn in an actively managed fund measures the skill level of the manager; the average active manager is not skilled and therefore does not add value; if managers are skilled their returns should persist—they should be able to consistently beat the market; in light of evidence that there is little or no persistence in actively managed funds' returns, investors who pick funds on the basis of past returns are not behaving rationally; and finally, because most active managers' compensation does not depend on the return they generate, their compensation is not performance–based.

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