The Sources of Portfolio Volatility and Mutual Fund Performance

48 Pages Posted: 11 Mar 2023

See all articles by David A. Rakowski

David A. Rakowski

University of Texas at Arlington

Nima Vafai

University of Texas of the Permian Basin

Multiple version iconThere are 3 versions of this paper

Abstract

We conduct a volatility decomposition to identify the source of performance differences between low volatility and high volatility mutual funds. Our procedure demonstrates how security-level variances and covariances lead to idiosyncratic volatility effects at the portfolio level. We show that a measure constructed from the average covariances of securities in a fund’s portfolio is sufficient to characterize the portfolio-level idiosyncratic volatility effect. In contrast, the security-level variances of funds’ holdings are only weakly associated with the idiosyncratic volatility effect but are closely tied to a fund’s exposure to the beta anomaly.

Keywords: Mutual funds, return volatility, fund manager skill, beta anomaly, return covariance

Suggested Citation

Rakowski, David A. and Vafai, Nima, The Sources of Portfolio Volatility and Mutual Fund Performance. Available at SSRN: https://ssrn.com/abstract=4384848 or http://dx.doi.org/10.2139/ssrn.4384848

David A. Rakowski (Contact Author)

University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States

Nima Vafai

University of Texas of the Permian Basin ( email )

4901 East University
Odessa, TX 79762
United States

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