Modern Asset Theory: A Framework for Successful Active Management

Abstract

Active management is a term that has many meanings and we have found the defining characteristics needed for success as an "active manager" elusive within the literature. In this paper we offer a set of criteria that defines an active manager and his success. In order to facilitate this, we introduce several definitions, which lead to a logically coherent evaluation framework. We expand on the definitions of these six key concepts: Introduce a specific concept of Ruin, Assets, Risk, Discount rate, Margin of safety, and Optimization. Through these definitions a strong defense of active management emerges. Furthermore, to the extent one chooses to limit the definitions we offer, our framework reduces to that of Modern Portfolio Theory. Overall, we have aimed to construct a robust expansion of a framework for active management, one that has been found wanting in the current literature.