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How to calculate breadth: An evolution of the fundamental law of active portfolio management

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  • David Buckle

    (Merrill Lynch Investment Managers)

Abstract

Grinold and Kahn's highly acclaimed fundamental law of active management has as a weak point the lack of a measurable definition of breadth. Buckle (2003) developed a more general model of active portfolio management that uses fewer assumptions than Grinold and Kahn, resulting in the generalised fundamental law of active management. This law unfortunately has quite a complex mathematical representation. By applying some of Grinold and Kahn's assumptions to this generalised law, however, one derives a semi-generalised law, which is identical in form to Grinold and Kahn's original law, but with a measurable definition of breadth. The simplicity of application of this semi-generalised law is illustrated in several worked examples.

Suggested Citation

  • David Buckle, 2004. "How to calculate breadth: An evolution of the fundamental law of active portfolio management," Journal of Asset Management, Palgrave Macmillan, vol. 4(6), pages 393-405, April.
    • Handle: RePEc:pal:assmgt:v:4:y:2004:i:6:d:10.1057_palgrave.jam.2240118
    DOI: 10.1057/palgrave.jam.2240118
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    Citations

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    Cited by:

    1. Martin Zurek & Lars Heinrich, 2021. "Bottom-up versus top-down factor investing: an alpha forecasting perspective," Journal of Asset Management, Palgrave Macmillan, vol. 22(1), pages 11-29, February.
    2. Lars Heinrich & Martin Zurek, 2019. "Alpha forecasting in factor investing: discriminating between the informational content of firm characteristics," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 33(3), pages 243-275, September.
    3. Lars Heinrich & Antoniya Shivarova & Martin Zurek, 2021. "Factor investing: alpha concentration versus diversification," Journal of Asset Management, Palgrave Macmillan, vol. 22(6), pages 464-487, October.
    4. Hubert Dichtl & Wolfgang Drobetz, 2009. "Does tactical asset allocation work? Another look at the fundamental law of active management," Journal of Asset Management, Palgrave Macmillan, vol. 10(4), pages 235-252, October.
    5. Ding, Zhuanxin & Martin, R. Douglas, 2017. "The fundamental law of active management: Redux," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 91-114.
    6. Ludwig B Chincarini & Daehwan Kim, 2007. "Another look at the information ratio," Journal of Asset Management, Palgrave Macmillan, vol. 8(5), pages 284-295, December.
    7. Leigh Sneddon, 2020. "Strategy design and the fallacies of breadth," Journal of Asset Management, Palgrave Macmillan, vol. 21(7), pages 626-635, December.

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