Valuing Information Using Utility Functions: How Much Should We Pay for Forecasts of Returns?
City University Business School Banking & Finance Working Paper
37 Pages Posted: 11 May 2001
Date Written: May 18, 2001
This study investigates what is an appropriate level of investment management fees. Using the CRRA utility function with the range of the coefficient of the CRRA suggested by Mehra and Prescott (1985), we find that the value of information added by linear factor models of Fama and French (1992) exceeds observed management fees and only equals them for hitherto unmeasured magnitudes of risk aversion.
Keywords: Value of Information, CAPM, Fama-French Model
JEL Classification: G20, G12
Suggested Citation: Suggested Citation