Fund Managers May Cause Their Benchmarks to Be Priced 'Risks'

13 Pages Posted: 18 Oct 2003

See all articles by Michael J. Stutzer

Michael J. Stutzer

University of Colorado at Boulder - Leeds School of Business

Abstract

The presence of a positive intercept ("alpha") in a regression of an investment fund's excess returns on a broad market portfolio's excess return (as in the CAPM) and other "factor" portfolios' excess returns (e.g. the Fama and French factors) is frequently interpreted as evidence of superior fund performance. This paper theoretically and empirically supports the notion that the additional factors may proxy for benchmark portfolios that fund managers try to beat, rather than proxying for state variables of future risks that investors (in conventional theory) are supposed to care about.

Keywords: fund management, portfolio choice, benchmark investing, tracking error variance, Fama-French factors

JEL Classification: D81, G11, G12, G14

Suggested Citation

Stutzer, Michael Jay, Fund Managers May Cause Their Benchmarks to Be Priced 'Risks'. Available at SSRN: https://ssrn.com/abstract=453540 or http://dx.doi.org/10.2139/ssrn.453540

Michael Jay Stutzer (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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