Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons




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    • Lehmann is from the Department of Economics and the Graduate School of Business, Columbia University, and the National Bureau of Economic Research. Modest is from the Graduate School of Business, Columbia University, and the School of Business Administration, University of California, Berkeley. We would like to express our gratitude to Roy Henriksson for providing us with his mutual fund data base, Karen Bettauer for assistance in updating it, and the Faculty Research Fund of the Columbia Business School and the Institute for Quantitative Research in Finance for their support. We are also grateful for comments from Allan Kleidon, Robert Korajczyk, Cheng-Few Lee, Arthur Warga, seminar participants at Stanford University and the Universities of California, Berkeley and Los Angeles, and an anonymous referee. We alone remain responsible for any remaining errors.


The authors' main goal in this paper is to ascertain whether conventional measures of abnormal mutual fund performance are sensitive to the benchmark chosen to measure normal performance. They employ the standard CAPM benchmarks and a variety of APT benchmarks to investigate this question. They find little similarity between the absolute and relative mutual fund rankings obtained from these alternative benchmarks, which suggests the importance of knowing the appropriate model for risk and return in this context. In addition, the rankings are not insensitive to the method used to construct the APT benchmark. Finally, they find statistically significant measured abnormal performance using all the benchmarks. The economic explanation for this phenomenon appears to be an open question.