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The Performance of Mutual Funds in the Period 1945-1964


Michael C. Jensen


Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

May 1, 1967

Journal of Finance, Vol. 23, No. 2, pp. 389-416, 1967

Abstract:     
In this paper I derive a risk-adjusted measure of portfolio performance (now known as Jensen's Alpha) that estimates how much a manager's forecasting ability contributes to the fund's returns. The measure is based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated). I apply the measure to estimate the predictive ability of 115 mutual fund managers in the period 1945-1964 - that is their ability to earn returns which are higher than those we would expect given the level of risk of each of the portfolios. The foundations of the model and the properties of the performance measure suggested here are discussed in Section II.

The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their bookkeeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses.

Number of Pages in PDF File: 37

Keywords: Jensen's Alpha, mutual fund performance, risk-adjusted returns, forecasting ability, predictive ability

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Date posted: August 31, 2002  

Suggested Citation

Jensen, Michael C., The Performance of Mutual Funds in the Period 1945-1964 (May 1, 1967). Journal of Finance, Vol. 23, No. 2, pp. 389-416, 1967. Available at SSRN: http://ssrn.com/abstract=244153 or http://dx.doi.org/10.2139/ssrn.244153

Contact Information

Michael C. Jensen (Contact Author)
Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
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National Bureau of Economic Research (NBER) ( email )
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European Corporate Governance Institute (ECGI) ( email )
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Belgium
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