IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/1721.html
   My bibliography  Save this paper

Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons

Author

Listed:
  • Bruce N. Lehmann
  • David M. Modest

Abstract

Our primary goal in this paper is to ascertain whether the absolute and relative rankings of managed funds are sensitive to the benchmark chosen to measure normal performance. We employ the standard CAPM benchmarks and a variety of APT benchmarks to investigate this question. We found that there is little similarity between the absolute and relative mutual fund rankings obtained from alternative benchmarks which suggests the importance of knowing the appropriate model for risk and expected return in this context. In addition, the rankings are quite sensitive to the method used to construct the APT benchmark. One would reach very different conclusions about the funds' performance using smaller numbers of securities in the analysis or the less efficient methods for estimating the necessary factor models than one would arrive at using the maximum likelihood procedures with 750 securities. We did, however, find the rankings of the funds are not very sensitive to the exact number of common sources of systematic risk that are assumed to impinge on security returns. Finally, we found statistically significant measured abnormal performance using all the benchmarks. The economic explanation of this phenomenon appears to be an open question.

Suggested Citation

  • Bruce N. Lehmann & David M. Modest, 1985. "Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons," NBER Working Papers 1721, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1721
    Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w1721.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, May.
    2. Dybvig, Philip H., 1983. "An explicit bound on individual assets' deviations from APT pricing in a finite economy," Journal of Financial Economics, Elsevier, vol. 12(4), pages 483-496, December.
    3. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    4. Roll, Richard & Ross, Stephen A, 1980. " An Empirical Investigation of the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 35(5), pages 1073-1103, December.
    5. Blume, Marshall E & Friend, Irwin, 1973. "A New Look at the Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 28(1), pages 19-33, March.
    6. Ingersoll, Jonathan E, Jr, 1984. " Some Results in the Theory of Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 39(4), pages 1021-1039, September.
    7. Mayers, David & Rice, Edward M., 1979. "Measuring portfolio performance and the empirical content of asset pricing models," Journal of Financial Economics, Elsevier, vol. 7(1), pages 3-28, March.
    8. Farrell, James L, Jr, 1974. "Analyzing Covariation of Returns to Determine Homogeneous Stock Groupings," The Journal of Business, University of Chicago Press, vol. 47(2), pages 186-207, April.
    9. Grinblatt, Mark & Titman, Sheridan, 1983. "Factor pricing in a finite economy," Journal of Financial Economics, Elsevier, vol. 12(4), pages 497-507, December.
    10. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    11. Brown, Stephen J & Weinstein, Mark I, 1983. " A New Approach to Testing Asset Pricing Models: The Bilinear Paradigm," Journal of Finance, American Finance Association, vol. 38(3), pages 711-743, June.
    12. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
    13. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
    14. McDonald, John G, 1973. "French Mutual Fund Performance: Evaluation of Internationally-Diversified Portfolios," Journal of Finance, American Finance Association, vol. 28(5), pages 1161-1180, December.
    15. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
    16. Admati, Anat R. & Pfleiderer, Paul, 1985. "Interpreting the factor risk premia in the arbitrage pricing theory," Journal of Economic Theory, Elsevier, vol. 35(1), pages 191-195, February.
    17. Firth, Michael A, 1977. "The Investment Performance of Unit Trusts in the Period 1965-75," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(4), pages 597-604, November.
    18. Reinganum, Marc R., 1981. "Misspecification of capital asset pricing : Empirical anomalies based on earnings' yields and market values," Journal of Financial Economics, Elsevier, vol. 9(1), pages 19-46, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1721. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.