Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation

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Finance Papers
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Finance
Finance and Financial Management
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Baks, Klaas Pieter
Metrick, Andrew
Wachter, Jessica A
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This paper analyzes mutual-fund performance from an investor's perspective. We study the portfolio-choice problem for a mean-variance investor choosing among a risk-free asset, index funds, and actively managed mutual funds. To solve this problem, we employ a Bayesian method of performance evaluation; a key innovation in our approach is the development of a flexible set of prior beliefs about managerial skill. We then apply our methodology to a sample of 1,437 mutual funds. We find that some extremely skeptical prior beliefs nevertheless lead to economically significant allocations to active managers.

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2001-01-01
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The Journal of Finance
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At the time of publication, author Jessica A Wachter was affiliated with New York University. Currently, she is a faculty member at the Wharton School at the University of Pennsylvania.
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