Our first investor, the dogmatist, has extreme prior beliefs about the potential for manager skill. The dogmatist rules out any potential for skill, either fixed or time varying, for any fund manager. That is, the dogmatist’s view is that ai0 is fixed at 1 12ðexpense þ 0:01 turnoverÞ and that ai1 is fixed at zero, where expense and turnover are the fund’s reported annual expense ratio and turnover, and where we assume a round-trip total trade cost of 1% (this prior specification is similar to Pastor and Stambaugh (2002a,b)). The dogmatist believes that a fund manager provides no performance through benchmark timing or stock selection skills, and.
