Performance Constraints in Investment Management

Identifying Reasons for Performance Shortfalls

Most stock fund managers fail to generate returns greater than their respective benchmarks. Current financial orthodoxy, which in this paper we will refer to as Modern Finance Theory (MFT), suggests that this underperformance is the result of stock markets being informationally “efficient”. In an efficient market, all available information is quickly (and appropriately) incorporated into a stock’s price, making active stock selection costly and futile.

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Value Investing and Modern Finance Theory Author: Matthew DePaola

On May 17, 1984, Columbia University held a symposium in celebration of the 50th anniversary of former professors Benjamin Graham and David Dodd’s book Security Analysis. During the event professor Michael Jensen, then at the University of Rochester, was invited to provide a defense of the then (and still) reigning investment theory in academic finance, known as the efficient market hypothesis (EMH).

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