Upcoming
This paper is in progress. The summary below previews what it will cover; the working paper and a less-technical write-up will be published here when ready.
Most discussions of investment performance lump together three very different things: what the market gave you, what you earned through skill, and what fell in your lap.
Building on Nature Abhors an Undiversified Bet, this paper decomposes portfolio returns into three components — Table Stakes (β), Skill (α), and Luck (ω) — and shows that Skill is precisely an investor's ability to predict the non-systematic component of risky-asset price changes. The framework clarifies what genuine alpha generation requires, and where apparent outperformance is just a draw from the randomization term.