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The Persistence of Risk-Adjusted Mutual Fund Performance

Working Paper Series S-95-13

Posted: 31 Aug 1995  

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Christopher R. Blake

Gabelli School of Business, Fordham University

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Abstract

This paper examines mutual fund predictability for common stock funds, using a sample free of survivorship bias, andmeasures performance using risk-adjusted returns. We reconfirm the hot hands result that high return can predict high return in the short run. Like Hendricks, Patel and Zeckhauser, we find that past performance is predictive of future risk-adjusted performance in both the short run and longer run. Furthermore, when we utilize modern portfolio theory (MPT) techniques to allocate capital among funds, we can construct a portfolio of funds based on prior data that significantly outperforms a rule based on past rank alone and that produces a positive risk-adjusted excess return. In addition, we demonstrate the improvement in performance using MPT by selecting a combination of actively managed portfolios that has the same risk as a portfolio of index funds but has higher mean return. While consistent with past studies, our study finds that expenses account for only part of the differences in performance across funds. We find that there is still predictability even after the major impacts of expenses have been removed. Throughout our study we are able to construct portfolios of funds that have small but statistically significant positive risk-adjusted returns during a period where mutual funds in general had negative risk-adjusted returns.

JEL Classification: D89

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and Blake, Christopher R., The Persistence of Risk-Adjusted Mutual Fund Performance. Working Paper Series S-95-13. Available at SSRN: https://ssrn.com/abstract=6656

Edwin J. Elton (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Christopher R. Blake

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
Lowenstein Building
New York, NY 10023
United States
212-636-6750 (Phone)

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