EXECUTIVE SUMMARY

• Below-average market volatility is typically associated with above-average returns. Given a choice, therefore, most investors would prefer low volatility to high.

• For active managers, however, the choice is less obvious: lower market volatility is associated with lower correlation and lower dispersion, both of which make active management harder to justify.

• Active portfolios are typically more volatile than their benchmarks; how much more volatile depends in part on correlations. Active managers pay an implicit cost of concentration, which rises when correlations decline.

• Low dispersion makes it harder for active managers to add value, and reduces the incremental return of those who do.

• These perspectives highlight the conflict between the goals of absolute and relative return generation.