02384cam a22002777 4500001000600000003000500006005001700011008004100028100001700069245010700086260006600193490004100259500001600300520116600316530006101482538007201543538003601615690009401651690012701745700002101872700002201893710004201915830007601957856003702033856003602070w7069NBER20150704172519.0150704s1999 mau||||fs|||| 000 0 eng d1 aBaks, Klaas.10aBayesian Performance Evaluationh[electronic resource] /cKlaas Baks, Andrew Metrick, Jessica Wachter. aCambridge, Mass.bNational Bureau of Economic Researchc1999.1 aNBER working paper seriesvno. w7069 aApril 1999.3 aThis paper proposes a Bayesian method of performance evaluation for investment managers. We begin with a flexible set of prior beliefs that can be elicited without any reference to probability distributions or their parameters. We then combine these prior beliefs with a general multi-factor model and derive an analytical solution for the posterior expectation of alpha', the intercept term from the model. This solution can be computed using only a few extra steps beyond maximum likelihood estimation and does not require a comprehensive or bias-free database. We then apply our methodology to a sample of domestic diversified equity mutual funds and ask what prior beliefs would imply zero investment in active managers?' To justify such a zero-investment strategy, we find that a mean-variance investor would need to believe that less than 1 out of every 100,000 managers has an expected alpha greater than 25 basis points per month. Overall, our analysis suggests that even when the average manager is expected to underperform passive benchmarks, it requires very strong prior beliefs to imply zero investment in managers with the best past performance. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG11 - Portfolio Choice • Investment Decisions2Journal of Economic Literature class. 7aG14 - Information and Market Efficiency • Event Studies • Insider Trading2Journal of Economic Literature class.1 aMetrick, Andrew.1 aWachter, Jessica.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w7069.4 uhttp://www.nber.org/papers/w706941uhttp://dx.doi.org/10.3386/w7069