Evaluating and Investing in Equity Mutual Funds
NBER Working Paper No. 7779
Our framework for evaluating and investing in mutual funds combines observed returns on funds and passive assets with prior beliefs that distinguish pricing-model inaccuracy from managerial skill. A fund's alpha' is defined using passive benchmarks. We show that returns on non-benchmark passive assets help estimate that alpha more precisely for most funds. The resulting estimates generally vary less than standard estimates across alternative benchmark specifications. Optimal portfolios constructed from a large universe of equity funds can include actively managed funds even when managerial skill is precluded. The fund universe offers no close substitutes for the Fama-French and momentum benchmarks.
Document Object Identifier (DOI): 10.3386/w7779
Published: Pastor, Lubog and Robert F. Stambaugh. "Investing In Equity Mutual Funds," Journal of Financial Economics, 2002, v63(3,Mar), 351-380.
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