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
Relatedly, controlling for the forecast error of the change in fiscal policy does not, in our
application, provide a way of estimating the causal effect of fiscal policy on growth. Over the
two-year intervals that we consider, changes in fiscal policy are unlikely to be orthogonal to
economic developments. Thus, the forecast error of fiscal consolidation over our two-year
intervals cannot be interpreted as an identified fiscal shock and cannot yield estimates of
actual fiscal multipliers. A large literature seeks to identify such exogenous shifts in
government spending and revenues.
It is important to explore score reliability in virtually all studies, because tests are not reliable. The present paper explains the most frequently used reliability estimate, coefficient alpha, so that the coefficient's conceptual underpinnings will be understood. Researchers need to understand score reliability because of the possible impact reliability has on the interpretation of research results. There are several common misconceptions about the basic ideas of score reliability.