Chapter 32

An actively managed portfolio involves trading with the intent of generating improved performance.

Distinguishing alpha and beta involves measurement and attribution and the process of identifying how much of an asset's return is generated by alpha and how much is generated by beta.

Enhanced index products are designed to take slightly more risk than the index within tightly controlled parameters and offer a little extra return, usually on a large pool of capital.

Index products take little or no active risk, extract no added value, and are not expected to generate active return.

In the new investment model, investments are allocated with flexibility and in the explicit context of alpha and beta management.

A passively managed portfolio, such as an indexed buy-and-hold portfolio. seeks to match the return of an index or a benchmark without engaging in active trading that attempts to generate improved performance.

Portable alpha is the ability of a particular investment product or strategy to be used in the separation of alpha and beta.

Separating alpha and beta involves portfolio management and refers to attempts to independently manage a portfolio's alpha and its exposure to beta, each toward desired levels.

Smart beta is the strategy of implementing a rules-based portfolio weighting scheme based on one or more characteristics in the underlying assets that generates portfolio weights that differ from a market-capitalization weighting scheme.

The strategic asset allocation decision is the long-term target asset allocation based on investor objectives and long-term expectations of returns and risk.

Tactical asset allocation is the process of making portfolio decisions to alter the systematic risks of the portfolio through time in an attempt to earn superior risk adjusted returns.

In the traditional approach to portfolio allocation, the top-level decision is a long-term target allocation decision, known as the strategic asset allocation decision.

A zero-sum game is a market, environment, or situation in which any gains to one party must be equally offset by losses to one or more other parties.