Abstract
The author first observes that there are three primary sources of investment risk and return: interest rate risk, equity market risk, and active risk. Interest rate risk and equity market risk are associated with the variable returns to bond and stock markets. Active or manager risk includes the pursuit of additional returns from active portfolio management. This covers a wide range of activities including market timing, security selection, and tactical asset allocation. He then observes that the traditional approach to portfolio structure involves hiring active portfolio managers to implement allocations to stock or bond markets. In that design, active management is bundled with market exposure. He turns to a description of a core and satellite approach, which involves separating active management from ownership of an asset class, examining the investment and tax considerations relevant to the choice of portfolio structure.
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