Jonathan Berk and Jules van Binsbergen: The Arithmetic of Active Management, Revisited (EP.220)

<p>Do you feel like you have a good grasp of financial markets? Think again! In this episode, we take a plunge into the world of financial markets with experts Jules van Binsbergen and Jonathan Berk. Jules is a Professor of Finance at the Wharton School of the University of Pennsylvania and Jonathan is a Professor of Finance at Stanford Graduate School of Business. They also host a popular podcast called <em>Else Equal, </em>which explores the science and strategy of making better financial decisions, and have written several academic papers that challenge the status quo. In our conversation, we discuss their research on the relationship between manager skill and fund performance, the best ways to measure performance, and reasons why benefits are in favour of the managers. We also explore the dogma surrounding mutual funds, the differences between active and passive management, and how to measure efficient capital markets. Listeners will also hear perspectives that challenge their understanding of capital markets and viewpoints that completely disagree with previous guests. Although we have covered this topic before in previous episodes, this conversation will fundamentally change the way you view financial markets and how to think about them.</p> <p> </p> <p><strong>Key Points From This Episode:</strong></p> <p> </p> <ul> <li>What information fund performance contains about manager skill. <strong>(0:04:04)</strong></li> <li>Reasons why manager skill and performance are unrelated. <strong>(0:04:59)</strong></li> <li>We learn how manager skills should be measured. <strong>(0:06:57)</strong></li> <li>How to choose the appropriate benchmark to measure value added. <strong>(0:09:26)</strong></li> <li>Find out if you can use factor-mimicking portfolios to measure risk-adjusted returns. <strong>(0:12:05)</strong></li> <li>Whether funds that directly target risk factors can be used as an investable benchmark. <strong>(0:16:35)</strong></li> <li>What the skill of active managers are when skill is measured as value-added.