Exploring the Dimensions of Active Management.

The article discusses active portfolio management and examines a discussion of viewing portfolio construction as an optimization problem proposed by M. Barton Waring and Laurence B. Siegel. The author looks at assumptions made about the covariance structure of active return that are used in optimal portfolio structure. Using sensitivity analysis, the author finds that the degree of diversification in active returns and the sources of active return leads to variation in optimal portfolios. The author concludes that active portfolio management is made up of the level of active return, the volatility of active return, and the covariance structure of active return.