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Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation

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  • Klaas P. Baks

Abstract

This paper analyzes mutual-fund performance from an investor's perspective. We study the portfolio-choice problem for a mean-variance investor choosing among a risk-free asset, index funds, and actively managed mutual funds. To solve this problem, we employ a Bayesian method of performance evaluation; a key innovation in our approach is the development of a flexible set of prior beliefs about managerial skill. We then apply our methodology to a sample of 1,437 mutual funds. We find that some extremely skeptical prior beliefs nevertheless lead to economically significant allocations to active managers. Copyright The American Finance Association 2001.

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  • Klaas P. Baks, 2001. "Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation," Journal of Finance, American Finance Association, vol. 56(1), pages 45-85, February.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:1:p:45-85
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