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Reengineering Investment Management

The conventional approach to building portfolios of investments is inefficient. Our usual hierarchy of investment decisions imposes constraints on active management that are under most circumstances unnecessary and produce mean-variance-inefficient portfolios. An approach to portfolio design based on the concept of alpha portability eliminates these harmful constraints; an analogous idea is beta portability. Numerical examples reveal that alpha independence and separation are necessary but insufficient conditions for mean-variance efficiency. These features must be combined with leverage to effect portability and achieve the best expected outcome.