Asset allocation
Encyclopedia
Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio
according to the investors risk tolerance, goals and investment time frame.
A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated
, hence diversification
reduces the overall risk
in terms of the variability of returns for a given level of expected return
. Asset diversification has been described as "the only free lunch you will find in the investment game". Academic research has painstakingly explained the importance of asset allocation and the problems of active management
(see academic studies section below).
Although risk is reduced as long as correlation
s are not perfect, it is typically forecast (wholly or in part) based on statistical relationships (like correlation and variance
) that existed over some past period. Expectations for return are often derived in the same way.
When such backward-looking approaches are used to forecast future returns or risks using the traditional mean-variance optimization approach to asset allocation of modern portfolio theory
, the strategy is, in fact, predicting future risks and returns based on past history. As there is no guarantee that past relationships will continue in the future, this is one of the "weak links" in traditional asset allocation strategies as derived from. Other, more subtle weaknesses include the "butterfly effect
", by which seemingly minor errors in forecasting lead to recommended allocations that are grossly skewed from investment mandates and/or impractical—often even violating an investment manager's "common sense" understanding of a tenable portfolio-allocation strategy.
There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite.
Strategic Asset Allocation — the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon.
Tactical Asset Allocation
— method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains.
Core-Satellite Asset Allocation — is more or less a hybrid of both the strategic and tactical allocations mentioned above.
Systematic Asset Allocation is another approach which depends on three assumptions. These are-
, L. Randolph Hood, and SEI's Gilbert L. Beebower (BHB) published a study about asset allocation of 91 large pension fund
s measured from 1974 to 1983. They replaced the pension funds' stock, bond, and cash selections with corresponding market indexes. The indexed quarterly return were found to be higher than pension plan's actual quarterly return. The two quarterly return series' linear correlation
was measured at 96.7%, with shared variance
of 93.6%. A 1991 follow-up study by Brinson
, Singer, and Beebower measured a variance of 91.5%. The conclusion of the study was that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes was sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the BHB study lumped together as
"market timing
". One problem with the Brinson
study was that the cost factor in the two return series was not clearly discussed. However, in response to a letter to the editor, Hood noted that the returns series were gross of management fees.
In 1997, William Jahnke initiated debate on this topic, attacking the BHB study in a paper titled The Asset Allocation Hoax. The Jahnke discussion appeared in the Journal of Financial Planning as an opinion piece, not a peer reviewed article. Jahnke's main criticism, still undisputed, was that BHB's use of quarterly data dampens the impact of compounding slight portfolio disparities over time, relative to the benchmark. One could compound 2% and 2.15% quarterly over 20 years and see the sizable difference in cumulative return. However, the difference is still 15 basis points (hundredths of a percent) per quarter; the difference is one of perception, not fact.
In 2000, Ibbotson
and Kaplan used five asset classes in their study Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? The asset classes included were large-cap US stock, small-cap US stock, non-US stock, US bonds, and cash. Ibbotson and Kaplan examined the 10 year return of 94 US balanced mutual funds versus the corresponding indexed returns. This time, after properly adjusting for the cost of running index funds, the actual returns again failed to beat index returns. The linear correlation between monthly index return series and the actual monthly actual return series was measured at 90.2%, with shared variance of 81.4%. Ibbotson concluded 1) that asset allocation explained 40% of the variation of returns across funds, and 2) that it explained virtually 100% of the level of fund returns. Gary Brinson has expressed his general agreement with the Ibbotson-Kaplan conclusions.
In both studies, it is misleading to make statements such as "asset allocation explains 93.6% of investment return". Even "asset allocation explains 93.6% of quarterly performance variance" leaves much to be desired, because the shared variance could be from pension funds' operating structure. Hood, however, rejects this interpretation on the grounds that pension plans in particular cannot cross-share risks and that they are explicitly singular entities, rendering shared variance irrelevant. The statistics were most helpful when used to demonstrate the similarity of the index return series and the actual return series.
A 2000 paper by Meir Statman found that using the same parameters that explained BHB's 93.6% variance result, a hypothetical financial advisor with perfect foresight in tactical asset allocation performed 8.1% better per year, yet the strategic asset allocation still explained 89.4% of the variance. Thus, explaining variance does not explain performance. Statman says that strategic asset allocation is movement along the efficient frontier
, whereas tactical asset allocation involves movement of the efficient frontier
. A more common sense explanation of the Brinson, Hood, and Beebower study is that asset allocation explains more than 90% of the volatility of returns of an overall portfolio, but will not explain the ending results of your portfolio over long periods of time. Hood notes in his review of the material over 20 years, however, that explaining performance over time is possible with the BHB approach but was not the focus of the original paper.
Bekkers, Doeswijk and Lam (2009) investigate the diversification benefits for a portfolio by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a market portfolio approach. The results suggest that real estate, commodities, and high yield add most value to the traditional asset mix of stocks, bonds, and cash. A study with such a broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a mean-variance analysis, neither in assessing the global market portfolio.
In fact, low cost was a more reliable indicator of performance. Bogle
noted that an examination of five-year performance data of large-cap blend funds revealed that the lowest cost quartile funds had the best performance, and the highest cost quartile funds had the worst performance.
s versus bond
s in one's portfolio is a very important decision. Simply buying stocks without regard of a possible bear market can result in panic selling
later. One's true risk tolerance can be hard to gauge until having experienced a real bear market with money invested in the market. Finding the proper balance is key.
The tables show why asset allocation is important. It determines an investor's future return, as well as the bear market burden that he or she will have to carry successfully to realize the returns.
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
according to the investors risk tolerance, goals and investment time frame.
Description
Many financial experts say that asset allocation is an important factor in determining returns for an investment portfolio. Asset allocation is based on the principle that different assets perform differently in different market and economic conditions.A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated
Correlation
In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....
, hence diversification
Diversification (finance)
In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of...
reduces the overall risk
Financial risk
Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...
in terms of the variability of returns for a given level of expected return
Expected return
The expected return is the weighted-average outcome in gambling, probability theory, economics or finance.It isthe average of a probability distribution of possible returns, calculated by using the following formula:...
. Asset diversification has been described as "the only free lunch you will find in the investment game". Academic research has painstakingly explained the importance of asset allocation and the problems of active management
Active management
Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index...
(see academic studies section below).
Although risk is reduced as long as correlation
Correlation
In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....
s are not perfect, it is typically forecast (wholly or in part) based on statistical relationships (like correlation and variance
Variance
In probability theory and statistics, the variance is a measure of how far a set of numbers is spread out. It is one of several descriptors of a probability distribution, describing how far the numbers lie from the mean . In particular, the variance is one of the moments of a distribution...
) that existed over some past period. Expectations for return are often derived in the same way.
When such backward-looking approaches are used to forecast future returns or risks using the traditional mean-variance optimization approach to asset allocation of modern portfolio theory
Modern portfolio theory
Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...
, the strategy is, in fact, predicting future risks and returns based on past history. As there is no guarantee that past relationships will continue in the future, this is one of the "weak links" in traditional asset allocation strategies as derived from. Other, more subtle weaknesses include the "butterfly effect
Butterfly effect
In chaos theory, the butterfly effect is the sensitive dependence on initial conditions; where a small change at one place in a nonlinear system can result in large differences to a later state...
", by which seemingly minor errors in forecasting lead to recommended allocations that are grossly skewed from investment mandates and/or impractical—often even violating an investment manager's "common sense" understanding of a tenable portfolio-allocation strategy.
Asset classes and strategies
There are many types of assets that may or may not be included in an asset allocation strategy:- cash and cash equivalents (e.g., certificate of depositCertificate of depositA certificate of Deposit is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions....
, money market funds) - fixed interest securities such as BondBond (finance)In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
s: investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging marketsEmerging marketsEmerging markets are nations with social or business activity in the process of rapid growth and industrialization. Based on data from 2006, there are around 28 emerging markets in the world . The economies of China and India are considered to be the largest...
; or Convertible securityConvertible securityA convertible security is a security that can be converted into another security. Most convertible securities are bonds or preferred stocks that pay regular quarterly interest and can be converted into shares of common stock if the stock price appreciates to a predetermined... - stockStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s: value, dividend, growth, sector specific or preferred (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; public equities versus private equities, domestic, foreign (developed), emerging or frontier markets - commercial or residential real estateReal estateIn general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
(also REITReal estate investment trustA real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
s) - natural resources: agriculture, forestry and livestock; energy or oil and gas distribution; carbon or water
- precious metals
- industrial metals and infrastructure
- collectibles such as art, coins, or stamps
- insuranceInsuranceIn law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
products (annuityAnnuity (US financial products)In the United States an annuity contract is created when an insured party, usually an individual, pays a life insurance company a single premium that will later be distributed back to the insured party over time...
, life settlementLife settlementA life settlement is a financial transaction in which the owner of a life insurance policysells an unneeded policy to a third party for more than its cash value and less than its face value. Until recently, if a policyowner opted out of a policy by surrendering the policy or allowing it to lapse,...
s, catastrophe bondCatastrophe bondCatastrophe bonds are risk-linked securities that transfer a specified set of risks from a sponsor to investors...
s, personal life insuranceLife insuranceLife insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
products, etc.) - derivativeDerivative (finance)A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
s such as long-short or market neutral strategies, optionOption (finance)In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
s, collateralized debt and futuresFutures contractIn finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange... - foreign currencyCurrencyIn economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
- venture capitalVenture capitalVenture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
, leveraged buyoutLeveraged buyoutA leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
, merger arbitrage or distressed securitiesDistressed securitiesDistressed securities are securities of companies or government entities that are either already in default, under bankruptcy protection, or in distress and heading toward such a condition. The most common distressed securities are bonds and bank debt...
There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite.
Strategic Asset Allocation — the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon.
Tactical Asset Allocation
Tactical asset allocation
Tactical asset allocation is a dynamic investment strategy that actively adjusts a portfolio’s asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing...
— method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains.
Core-Satellite Asset Allocation — is more or less a hybrid of both the strategic and tactical allocations mentioned above.
Systematic Asset Allocation is another approach which depends on three assumptions. These are-
- The markets provide explicit information about the available returns.
- The relative expected returns reflect consensus.
- Expected returns provide clues to actual returns.
Academic studies
In 1986, Gary P. BrinsonGary P. Brinson
Gary P. Brinson is a former investor and money manager. He is the founder of Brinson Partners a Chicago-based asset management firm acquired in 1994 by Swiss Bank Corporation, the predecessor of UBS...
, L. Randolph Hood, and SEI's Gilbert L. Beebower (BHB) published a study about asset allocation of 91 large pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s measured from 1974 to 1983. They replaced the pension funds' stock, bond, and cash selections with corresponding market indexes. The indexed quarterly return were found to be higher than pension plan's actual quarterly return. The two quarterly return series' linear correlation
Correlation
In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....
was measured at 96.7%, with shared variance
Coefficient of determination
In statistics, the coefficient of determination R2 is used in the context of statistical models whose main purpose is the prediction of future outcomes on the basis of other related information. It is the proportion of variability in a data set that is accounted for by the statistical model...
of 93.6%. A 1991 follow-up study by Brinson
Gary P. Brinson
Gary P. Brinson is a former investor and money manager. He is the founder of Brinson Partners a Chicago-based asset management firm acquired in 1994 by Swiss Bank Corporation, the predecessor of UBS...
, Singer, and Beebower measured a variance of 91.5%. The conclusion of the study was that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes was sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the BHB study lumped together as
"market timing
Market timing
Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis...
". One problem with the Brinson
Gary P. Brinson
Gary P. Brinson is a former investor and money manager. He is the founder of Brinson Partners a Chicago-based asset management firm acquired in 1994 by Swiss Bank Corporation, the predecessor of UBS...
study was that the cost factor in the two return series was not clearly discussed. However, in response to a letter to the editor, Hood noted that the returns series were gross of management fees.
In 1997, William Jahnke initiated debate on this topic, attacking the BHB study in a paper titled The Asset Allocation Hoax. The Jahnke discussion appeared in the Journal of Financial Planning as an opinion piece, not a peer reviewed article. Jahnke's main criticism, still undisputed, was that BHB's use of quarterly data dampens the impact of compounding slight portfolio disparities over time, relative to the benchmark. One could compound 2% and 2.15% quarterly over 20 years and see the sizable difference in cumulative return. However, the difference is still 15 basis points (hundredths of a percent) per quarter; the difference is one of perception, not fact.
In 2000, Ibbotson
Roger G. Ibbotson
Roger G. Ibbotson is professor of finance at Yale School of Management and has written extensively on capital market returns, cost of capital, and international investment. He is the former chairman and founder of Ibbotson Associates, a financial research and information firm that was acquired by...
and Kaplan used five asset classes in their study Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? The asset classes included were large-cap US stock, small-cap US stock, non-US stock, US bonds, and cash. Ibbotson and Kaplan examined the 10 year return of 94 US balanced mutual funds versus the corresponding indexed returns. This time, after properly adjusting for the cost of running index funds, the actual returns again failed to beat index returns. The linear correlation between monthly index return series and the actual monthly actual return series was measured at 90.2%, with shared variance of 81.4%. Ibbotson concluded 1) that asset allocation explained 40% of the variation of returns across funds, and 2) that it explained virtually 100% of the level of fund returns. Gary Brinson has expressed his general agreement with the Ibbotson-Kaplan conclusions.
In both studies, it is misleading to make statements such as "asset allocation explains 93.6% of investment return". Even "asset allocation explains 93.6% of quarterly performance variance" leaves much to be desired, because the shared variance could be from pension funds' operating structure. Hood, however, rejects this interpretation on the grounds that pension plans in particular cannot cross-share risks and that they are explicitly singular entities, rendering shared variance irrelevant. The statistics were most helpful when used to demonstrate the similarity of the index return series and the actual return series.
A 2000 paper by Meir Statman found that using the same parameters that explained BHB's 93.6% variance result, a hypothetical financial advisor with perfect foresight in tactical asset allocation performed 8.1% better per year, yet the strategic asset allocation still explained 89.4% of the variance. Thus, explaining variance does not explain performance. Statman says that strategic asset allocation is movement along the efficient frontier
Efficient Frontier
The efficient frontier is a concept in Modern portfolio theory introduced by Harry Markowitz and others. A combination of assets, i.e. a portfolio, is referred to as "efficient" if it has the best possible expected level of return for its level of risk...
, whereas tactical asset allocation involves movement of the efficient frontier
Efficient Frontier
The efficient frontier is a concept in Modern portfolio theory introduced by Harry Markowitz and others. A combination of assets, i.e. a portfolio, is referred to as "efficient" if it has the best possible expected level of return for its level of risk...
. A more common sense explanation of the Brinson, Hood, and Beebower study is that asset allocation explains more than 90% of the volatility of returns of an overall portfolio, but will not explain the ending results of your portfolio over long periods of time. Hood notes in his review of the material over 20 years, however, that explaining performance over time is possible with the BHB approach but was not the focus of the original paper.
Bekkers, Doeswijk and Lam (2009) investigate the diversification benefits for a portfolio by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a market portfolio approach. The results suggest that real estate, commodities, and high yield add most value to the traditional asset mix of stocks, bonds, and cash. A study with such a broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a mean-variance analysis, neither in assessing the global market portfolio.
Performance indicators
McGuigan described an examination of funds that were in the top quartile of performance during 1983 to 1993. During the second measurement period of 1993 to 2003, only 28.57% of the funds remained in the top quartile. 33.33% of the funds dropped to the second quartile. The rest of the funds dropped to the third or fourth quartile.In fact, low cost was a more reliable indicator of performance. Bogle
John Bogle
John Clifton "Jack" Bogle is the founder and retired CEO of The Vanguard Group. He is known for his 1999 book Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor, which became a bestseller and is considered a classic.-Early life and education:Bogle was born in in Verona, New...
noted that an examination of five-year performance data of large-cap blend funds revealed that the lowest cost quartile funds had the best performance, and the highest cost quartile funds had the worst performance.
Return versus risk trade-off
In asset allocation planning, the decision on the amount of stockStock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s versus bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
s in one's portfolio is a very important decision. Simply buying stocks without regard of a possible bear market can result in panic selling
Panic selling
Panic selling is a wide-scale selling of an investment, in order to get out of an investment . The main problem is that investors react simply out of emotion and fear, without evaluating the fundamentals. Almost all market crashes are caused by panic selling. Most major stock exchanges use trading...
later. One's true risk tolerance can be hard to gauge until having experienced a real bear market with money invested in the market. Finding the proper balance is key.
| Cumulative return after inflation from 2000-to-2002 bear market | |
|---|---|
| 80% stock / 20% bond | −34.35% |
| 70% stock / 30% bond | −25.81% |
| 60% stock / 40% bond | −19.99% |
| 50% stock / 50% bond | −13.87% |
| 40% stock / 60% bond | −7.46% |
| 30% stock / 70% bond | −0.74% |
| 20% stock / 80% bond | +6.29% |
| Projected 10 year Cumulative return after inflation (stock return 8% yearly, bond return 4.5% yearly, inflation 3% yearly |
|
|---|---|
| 80% stock / 20% bond | 52% |
| 70% stock / 30% bond | 47% |
| 60% stock / 40% bond | 42% |
| 50% stock / 50% bond | 38% |
| 40% stock / 60% bond | 33% |
| 30% stock / 70% bond | 29% |
| 20% stock / 80% bond | 24% |
The tables show why asset allocation is important. It determines an investor's future return, as well as the bear market burden that he or she will have to carry successfully to realize the returns.
See also
- Efficient-market hypothesis
- Tactical asset allocationTactical asset allocationTactical asset allocation is a dynamic investment strategy that actively adjusts a portfolio’s asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing...
- Mutual fundMutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
- Index fundIndex fundAn index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.-Tracking:Tracking can be achieved by trying to hold all of the...
- Asset locationAsset locationAsset location is a term used in personal finance to refer to how investors distribute their investments across savings vehicles including taxable, tax-deferred and tax-exempt accounts , grantor retainer annuity trusts, generation-skipping trusts, charitable remainder trusts or charitable lead...
- Performance attributionPerformance attributionPerformance Attribution or Investment Performance Attribution is a set of techniques that performance analysts use to explain why a portfolio's performance differed from the benchmark. This difference between the portfolio return and the benchmark return is known as the active return...
- Economic capitalEconomic capital-Finance and Economics:In financial services firms, economic capital can be thought of as the capital level shareholders would choose in absence of capital regulation....