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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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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 56 (2001)
Issue (Month): 1 (02)
Pages: 45-85

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Handle: RePEc:bla:jfinan:v:56:y:2001:i:1:p:45-85
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