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

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  • WAYNE FERSON
  • JERCHERN LIN

Abstract

type="main"> The literature has not established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. When alpha is defined using the client's utility function, a positive alpha generally means the client would want to buy. When markets are incomplete, investors will disagree about the attractiveness of a fund. We provide bounds on the expected disagreement with a traditional alpha and study the cross-sectional relation of disagreement and investor heterogeneity with the flow response to past fund alphas. The effects are both economically and statistically significant.

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  • Wayne Ferson & Jerchern Lin, 2014. "Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity," Journal of Finance, American Finance Association, vol. 69(4), pages 1565-1596, August.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:4:p:1565-1596
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    File URL: http://hdl.handle.net/10.1111/jofi.12165
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