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Quantitative Equity Portfolio Management by Daehwan Kim, Ludwig B Chincarini

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CHAPTER 12Leverage

Give me a lever long enough and a fulcrum on which toplace it, and I shall move the world.

—Archimedes

12.1 INTRODUCTION

Given a benchmark, the portfolio return can be broken down into two parts: the part related to the benchmark and the part not related to the benchmark. The first part is measured by the benchmark β multiplied by the benchmark return, and the second part is measured by αB plus a random component.1 That is,

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Part of the portfolio’s return is beyond the manager’s control. To some extent the portfolio goes the way the benchmark goes (represented by βrB), and occasionally, it does the proverbial “random walk” (represented ...

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