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Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation
Author(s) -
Baks Klaas P.,
Metrick Andrew,
Wachter Jessica
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00319
Subject(s) - portfolio , actuarial science , sample (material) , business , mutual fund , index (typography) , set (abstract data type) , asset (computer security) , mutual fund separation theorem , variance (accounting) , perspective (graphical) , open end fund , finance , economics , institutional investor , computer science , accounting , artificial intelligence , corporate governance , chemistry , computer security , chromatography , world wide web , programming language
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.