Download This PaperThe (Large) Effect of Return Horizon on Fund Alpha
Critical Finance Review, forthcoming.
54 Pages Posted: 5 May 2022 Last revised: 1 Nov 2023
Date Written: October 31, 2023
Abstract
Alpha depends on the return measurement horizon, particularly as the horizon becomes long. We introduce a procedure to estimate long-horizon alphas from short-horizon returns. Among those sample mutual funds with positive alphas estimated from monthly returns, nearly half have negative alpha estimates when returns are measured at the ten-year horizon. Among sample funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over 70% have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon returns can be uninformative or misleading regarding fund performance for both active and passive investors over longer horizons.
Keywords: alpha, beta, investment horizon, fund performance
JEL Classification: G10, G23
Suggested Citation: Suggested Citation
Feng Zhang (Contact Author)
Southern Methodist University (SMU) - Finance Department ( email )
SMU Cox School of Business
6212 Bishop Blvd
Dallas, TX 75275
United States
HOME PAGE: http://https://sites.google.com/view/fengzhangfin