We develop and implement a framework in which prior views and empirical evidence about pricing models and managerial skill can be incorporated formally into the invest- ment decision. Our framework relies on a set of passive indexes or \assets," consisting of nonbenchmark assets as well as the benchmark assets prescribed by a pricing model. A common interpretation of alpha, the intercept in a regression of the fund's excess return on the benchmarks, is that it represents the skill of the fund's manager in selecting mispriced securities. That interpretation is subject to a number of pitfalls, including a concern that the benchmarks used to de¯ne alpha might not.
