Practical Applications of The Bad Arithmetic of Active Management

Practical Applications Summary

As the debate between active and passive investors continues, it is useful to take a look back at the history of investment performance analysis. In The Bad Arithmetic of Active Management Brian Jacobsen of Wells Fargo Funds Management takes a critical look at a touchstone of received wisdom on the issue of active versus passive investing, William Sharpe’s classic article, The Arithmetic of Active Management .

The problem isn’t that Sharpe miscalculated, but that his categories are misnomers, and the assumptions that underpin them are deeply flawed. So even though the numbers add up, they can’t help you make the right choices between active and passive investments. In this interview with Institutional Investor Journals, Jacobsen explains why and what should be done to improve our analytical frameworks.