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Standard Portfolio theory strangely makes pitiful predictions about the asset management industry. Indeed, the standard Markowitz mean-variance framework and the equilibrium asset pricing models such as the CAPM that go with it presume that markets are more or less efficient and investors more or less rational in the sense that they maximize so-called Expected Utility functions. This, in theory, leads to the conclusion that the asset management industry does not provide much value-added.
The supposed value added of the asset management industry is typically measured with alpha and alpha after fess is negative for most investment funds. If the standard theory were correct, we would observe mostly big diversified and passive investment funds. Incidentally, the growth of...
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