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Evaluating and Investing in Equity Mutual Funds

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  • Lubos Pastor
  • Robert F. Stambaugh

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7779.

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Date of creation: Jul 2000
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Publication status: published as Pastor, Lubog and Robert F. Stambaugh. "Investing In Equity Mutual Funds," Journal of Financial Economics, 2002, v63(3,Mar), 351-380.
Handle: RePEc:nbr:nberwo:7779

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