SSRN-Where do Alphas Come From?: A New Measure of the Value of Active Investment Management by Andrew Lo

I propose a new measure of the value of
active investment management that captures both static and dynamic
contributions of a portfolio manager’s decisions. The measure is based
on a decomposition of a portfolio’s expected return into two distinct
components: a static weighted-average of the individual securities’
expected returns, and the sum of covariances between returns and
portfolio weights. The former component measures the portion of the
manager’s expected return due to static investments in the underlying
securities, while the latter component captures the forecast power
implicit in the manager’s dynamic investment choices.