Our framework assumes that funds' sensitivities to passive assets are constant over time. One way of relaxing this assumption is to model these coe±cients as linear functions of state variables, as for example in Ferson and Schadt (1996) and Shanken (1990). In such a modi¯cation, passive asset returns scaled by the state variables can be viewed as returns on additional passive assets (dynamic passive strategies), and the approach developed here could be extended to such a setting. Another approach to dealing with temporal variation in parameters could employ data on fund holdings. Daniel, Grinblatt, Titman, and Wermers (1997) and Wermers (2000), for example, use such data in.
