Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity

Wayne E. Ferson, Jerchern Lin

NBER Working Paper No. 19349
Issued in August 2013
NBER Program(s):Asset Pricing Program

The literature has not unambiguously established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. However, when alpha is defined using the client's marginal utility function, a client faced with a positive alpha would generally want to buy. When markets are incomplete performance measurement is inherently investor specific, and investors will disagree about the attractiveness of a given fund. We provide empirical bounds on the expected disagreement with a traditional alpha and study the cross sectional effects of disagreement and investor heterogeneity on the flow response to past fund alphas. The effects are both economically and statistically significant.

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Document Object Identifier (DOI): 10.3386/w19349

Published: WAYNE FERSON & JERCHERN LIN, 2014. "Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity," The Journal of Finance, vol 69(4), pages 1565-1596.

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