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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