Date of this Version
Journal of Financial Economics
We construct optimal portfolios of equity funds by combining historical returns on funds and passive indexes with prior views about asset pricing and skill. By including both benchmark and nonbenchmark indexes, we distinguish pricing-model inaccuracy from managerial skill. Modest confidence in a pricing model helps construct portfolios with high Sharpe ratios. Investing in active mutual funds can be optimal even for investors who believe managers cannot outperform passive indexes. Optimal portfolios exclude hot-hand funds even for investors who believe momentum is priced. Our large universe of funds offers no close substitutes for the Fama-French and momentum benchmarks.
© 2002. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
Pástor, Ľ., & Stambaugh, R. F. (2002). Investing in Equity Mutual Funds. Journal of Financial Economics, 63 (3), 351-380. http://dx.doi.org/10.1016/S0304-405X(02)00065-X
Date Posted: 27 November 2017
This document has been peer reviewed.