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

Listed author(s):
  • Wayne E. Ferson
  • Jerchern Lin

The literature has not unambiguously established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. However, when alpha is defined using the client's marginal utility function, a client faced with a positive alpha would generally want to buy. When markets are incomplete performance measurement is inherently investor specific, and investors will disagree about the attractiveness of a given fund. We provide empirical bounds on the expected disagreement with a traditional alpha and study the cross sectional effects of disagreement and investor heterogeneity on the flow response to past fund alphas. The effects are both economically and statistically significant.

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File URL: http://www.nber.org/papers/w19349.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19349.

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Date of creation: Aug 2013
Publication status: published as Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity Authors WAYNE FERSON, JERCHERN LIN Volume 69, Issue 4 August 2014 Pages 1565–1596
Handle: RePEc:nbr:nberwo:19349
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