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← The Case Against Active Stock Picking
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Question
What is the mathematical basis of William Sharpe's argument that active managers cannot, collectively, outperform the market?
1
The capital asset pricing model shows that all stocks will converge to the risk-free rate over time
2
Mathematical models show that stock prices are random walks that no analyst can predict
3
Because all investors own the market in aggregate, active investors collectively must also hold the market before costs — and after costs, they must collectively underperform by the amount of those costs
4
Sharpe proved that active managers always buy at the top and sell at the bottom due to herding behaviour
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