Return Horizon and Mutual Fund Performance

55 Pages Posted: 24 Mar 2020 Last revised: 10 Nov 2021

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

W.P. Carey School of Business

Michael J. Cooper

University of Utah - David Eccles School of Business

Feng Zhang

Cox School of Business, Southern Methodist University

Date Written: November 9, 2021

Abstract

Measures of investment performance, including alpha, the canonical measure of mean return after allowing for systematic (beta) risk, depend on return measurement horizon, because beta depends on horizon. We introduce a procedure that relies on a combination of theory and simulations to estimate long-return-horizon alphas and betas from short-horizon estimates. Compared to a benchmark of 41% estimated in monthly returns, the percentage of mutual funds with positive alpha estimates against the SPY decreases to 21% (increases to 46%) at the decade return horizon for funds with high (low) estimated monthly market betas. Alphas estimated from short-horizon (e.g. monthly) returns may be uninformative or even misleading regarding fund performance for investors with longer horizons.

JEL Classification: G10; G23

Suggested Citation

Bessembinder, Hendrik (Hank) and Cooper, Michael J. and Zhang, Feng, Return Horizon and Mutual Fund Performance (November 9, 2021). Available at SSRN: https://ssrn.com/abstract=3550284 or http://dx.doi.org/10.2139/ssrn.3550284

Hendrik (Hank) Bessembinder (Contact Author)

W.P. Carey School of Business ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://https://wpcarey.asu.edu/people/profile/2717225

Michael J. Cooper

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Feng Zhang

Cox School of Business, Southern Methodist University ( email )

6212 Bishop Blvd.
Dallas, TX Texas 75275
United States

HOME PAGE: http://https://sites.google.com/view/fengzhangfin

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