Investing in Equity Mutual Funds

37 Pages Posted: 20 Sep 2001

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Date Written: August 2001

Abstract

We construct optimal portfolios of equity funds by combining historical returns on funds and passive indexes with prior views about asset pricing and skill. By including both benchmark and nonbenchmark indexes, we distinguish pricing-model inaccuracy from managerial skill. Even modest confidence in a pricing model helps construct portfolios with high Sharpe ratios. Investing in active mutual funds can be optimal even for investors who believe active managers cannot outperform passive indexes. Optimal portfolios exclude hot-hand funds even for investors who believe momentum is priced. Our large universe of funds offers no close substitutes for the Fama-French and momentum benchmarks.

Keywords: mutual funds, portfolio selection

JEL Classification: G11, G12, C11

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F., Investing in Equity Mutual Funds (August 2001). CRSP Working Paper No. 532. Available at SSRN: https://ssrn.com/abstract=279994 or http://dx.doi.org/10.2139/ssrn.279994

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-834-4080 (Phone)
773-702-0458 (Fax)

HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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