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Evaluating and Investing in Equity Mutual Funds

Author

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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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Suggested Citation

  • Lubos Pastor & Robert F. Stambaugh, "undated". "Evaluating and Investing in Equity Mutual Funds," CRSP working papers 516, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  • Handle: RePEc:wop:chispw:516
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    File URL: http://gsbwww.uchicago.edu/fac/finance/papers/eval3.pdf
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    References listed on IDEAS

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    Cited by:

    1. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, Elsevier.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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