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Over 90% of an average pension fund s total return variance can be traced to its investment policy the long-term allocation of its investments across asset classes6 Even within asset classes, the allocation of a portfolio across subsets of the asset class can explain a large portion of the portfolio s return For 1985 1989, for example, over 97% of the returns to a fund known for stock selection Fidelity Magellan Fund were mirrored by a passive fund invested in large-cap growth stocks (46%), median-sized stocks (31%), small-cap stocks (19%), and European stocks (4%)7 Ideally, investors should be able to maximize both security selection and asset allocation That is, they should be able to nd skilled managers for each of the asset classes they choose to hold In practice, however, the task of combining asset allocation with security selection often involves a tradeoff.



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P1: KPE WY022-31 WY022/Pfaffenberger WY022/Pfaffenberger-v3.cls June 9, 2004 15:10

This title shows in the title bar of Internet Explorer, as shown in Figure 3-1.

From this and the initial conditions we obtain the answer y 5x 4x 1.6x3/2.





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That is, the investor may be able to nd active managers who have demonstrated an ability to add value, but the universes exploited by these managers may not encompass the asset class desired by the investor Given the presumed priority of the asset allocation choice, it is often the return from security selection that is sacri ced Consider the case of an investor who has both large-cap and smallcap equity managers On the one hand, to the extent that small-cap stocks are less ef ciently priced than their large-cap counterparts, the potential of the small-cap manager to add value relative to an underlying small-cap universe may be greater than the potential of the large-cap manager to add value relative to an underlying large-cap universe The investor may thus want to allocate more to the small-cap than the largecap manager.

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Stability studies are created to see how products deteriorate over time This information is used to nd the best-before date or the expiry date Stability studies are heavily used in the pharmaceutical industry and are also used in the food industry A product will potentially deteriorate differently depending on the storage conditions The product is therefore stored under variable conditions to test deterioration: r Light versus dark Light might affect the product r Temperatures from below freezing to above freezing Usually, high temperatures are worse than low temperatures r Freeze thaw freeze cycles Mainly used for liquids r Humidity Dry air can sometimes cause the product to evaporate.

On the other hand, small-cap stocks may be considered too risky in general, or may be expected to underperform larger-cap stocks In the interest of optimizing overall fund return and risk, the investor may wish to limit the allocation to the small-cap manager and allocate significantly more to the large-cap manager In that case, however, the investor sacri ces the potential alpha from small-cap security selection in exchange for overall asset class return and risk The investor s asset allocation decision comes down to a choice between sacri cing security selection return in favor of asset class performance and sacri cing asset class performance in favor of security selection return With alpha transport, investors need no longer face such Solomonic decisions Market neutral portfolio construction techniques and derivatives can be used to liberate managers, and manager performance, from their underlying asset classes Investors, or managers, can deploy deriva-.

Unfortunately, litigation in cyberspace is still in its infancy. Because the U.S. legal system works on precedent and there aren t many cyberspace precedents set, the system doesn t have the necessary background to make educated decisions. A side effect of this lack of precedents is that the legal system tends to move cautiously, as any decision will set precedent for later issues. This doesn t deter litigation in cyberspace, but it does complicate it. Furthermore, most crime that takes place on the Internet takes place through proxies. For example, DOS attacks are usually carried out via unsuspecting computers that were infected by worms or viruses. Also, most hackers perform their work by logging into one site and using that site to log into their target. The result is that a lot of unsuspecting people are held accountable for actions that they did not commit and inherit the burden of proving their innocence. In short, litigation on the Internet and other computer-related areas is still a tricky business. As such, it behooves anyone using the Internet or who runs a server to employ as much caution and security as possible.

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