The Sources of Portfolio Volatility and Mutual Fund Performance

47 Pages Posted: 16 Sep 2022

See all articles by Nima Vafai

Nima Vafai

University of Texas of the Permian Basin

David A. Rakowski

University of Texas at Arlington

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Abstract

We conduct a volatility decomposition to identify the source of performance differences between low volatility and high volatility mutual funds. Higher return covariances between fund holdings is associated with more fund-level exposure to the idiosyncratic volatility effect. The average security-level variance of fund holdings is only weakly associated with idiosyncratic volatility but 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: Mutual Funds, return volatility, fund manager skill, beta anomaly, return covariance, mutual fund holdings

Suggested Citation

Vafai, Nima and Rakowski, David A., The Sources of Portfolio Volatility and Mutual Fund Performance. Available at SSRN: https://ssrn.com/abstract=4220633

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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