The sources of portfolio volatility and mutual fund performance

53 Pages Posted: 10 Jan 2022 Last revised: 17 Sep 2023

See all articles by Nima Vafai

Nima Vafai

University of Texas of the Permian Basin

David A. Rakowski

University of Texas at Arlington

Multiple version iconThere are 3 versions of this paper

Date Written: September 14, 2023

Abstract

We conduct a volatility decomposition to identify the source of performance differences between low volatility and high volatility mutual funds. A higher level of return covariance of fund holdings is associated with more fund-level exposure to the idiosyncratic volatility effect. Average security-level variance of fund holdings is only weakly associated with idiosyncratic volatility. However, the average security-level variance of a fund’s holdings is closely tied to a fund’s exposure to the beta anomaly. We demonstrate that our measure of the within-portfolio covariance of fund holdings is useful in evaluating fund-level performance measures and exposure to volatility anomalies.

Keywords: intermediary-led asset pricing, mutual funds, return volatility, fund manager skill, volatility anomalies, market efficiency, portfolio returns

JEL Classification: G11, G12, G14, G20

Suggested Citation

Vafai, Nima and Rakowski, David A., The sources of portfolio volatility and mutual fund performance (September 14, 2023). Available at SSRN: https://ssrn.com/abstract=4005351 or http://dx.doi.org/10.2139/ssrn.4005351

Nima Vafai

University of Texas of the Permian Basin ( email )

4901 East University
Odessa, TX 79762
United States

David A. Rakowski (Contact Author)

University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States

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