Stochastic Dominance in Mutual Fund Returns
44 Pages Posted: 12 Mar 2020 Last revised: 10 Jul 2023
Date Written: February 19, 2020
Abstract
We examine the performance of actively managed mutual funds compared to the stock market portfolio. Using the concept of almost second-order stochastic dominance, we identify a small subset of funds that dominate the market portfolio, while more than half of funds are dominated in the short-term investment horizons. Compared to the traditional performance measure such as the Sharpe ratio, decision-making under the stochastic dominance framework results in different preference orders. Both fund investors and managers reveal their preference for the funds that dominate the market, which also significantly outperform their peers in the future.
Keywords: mutual fund returns, stochastic dominance, revealed preference
JEL Classification: G11, G23
Suggested Citation: Suggested Citation