Abstract
We consider a simple equilibrium model of active fund managers and consumers. Our model features zero net-of-fee alpha in equilibrium. However, using a common, but misspecified, model for the stochastic discount factor (SDF) implies positive measured alpha. This note, thus, warns against interpreting pricing errors as alpha: That is only true if the SDF is correctly specified. Our model is tractable enough to provide closed form solutions for all quantities of interest.
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