@techreport{NBERw7779,
 title = "Evaluating and Investing in Equity Mutual Funds",
 author = "Lubos Pastor and Robert F. Stambaugh",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "7779",
 year = "2000",
 month = "July",
 URL = "http://www.nber.org/papers/w7779",
 abstract = {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.},
}