Using Random Portfolios to Evaluate the Performance of the Ultimate Stock-Pickers Index

Abstract

Measuring the effective skill of a professional money manager in generating yields has Always been a disputable matter in the fund management literature. This paper evaluates the performance of the Morningstar Ultimate Stock-Pickers index with portfolio opportunity distributions, i.e. the stocks most heavily bought by the top portfolio managers are compared with a number of portfolios that have zero skills. Randomly populated portfolios can provide a statistical test indicating that a particular trading strategy leads to better performances rather than merely being the result of luck. We show no superior stock picking skill of the industry’s brightest minds.

Keywords: performance evaluation, random portfolios, stock picking skills

JEL Classification: G11, G17