Open AccessDo Mutual Funds Attract the Right Investor? A Stochastic Dominance Approach
Author(s) -
Yudhvir Seetharam
Publication year - 2013
Publication title -
journal of economics and behavioral studies
Language(s) - English
Resource type - Journals
ISSN - 2220-6140
DOI - 10.22610/jebs.v5i12.463
Subject(s) - stochastic dominance , mutual fund , mutual fund separation theorem , dominance (genetics) , closed end fund , index (typography) , economics , investor profile , actuarial science , ranking (information retrieval) , financial economics , business , econometrics , microeconomics , finance , behavioral economics , computer science , portfolio , biochemistry , chemistry , machine learning , world wide web , gene , incentive
Decision theory is concerned with identifying values and uncertainties in a given decision that result in the optimal outcome (Wald, 1939). It is one of the core aspects of any financial or investment decision. We consider the case where the investor has the choice between a passive index (such as a market index) and an actively managed mutual fund. Our analysis aims to determine which option an investor will choose based on a statistical ranking method known as stochastic dominance. We then evaluate this choice against the background information supplied by the mutual fund to ascertain whether the choice given by stochastic dominance is indeed in line with the investor profile given by the mutual fund. It is found that of the 11 mutual funds examined over the sample period of April 2006 to April 2013, only 4 attract the correct type of investor, 3 attract a mixture of investors and 4 attract (arguably) the wrong type of investor.