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http://hdl.handle.net/2451/26675
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| Title: | Common Factors in Mutual Fund Returns |
| Authors: | Elton, Edwin J.
Gruber,Martin J.
Blake, Christopher R. |
| Issue Date: | Mar-1997 |
| Series/Report no.: | FIN-97-004 |
| Abstract: | A great deal of the literature in financial economics contains the
assumption that returns are a linear function of a set of observable
factors. The specification of the variables in the linear process (known
as the return-generating process) is one of the key issues in finance
today. The return-generating process is an important building block in
asset pricing models, portfolio optimization models, mutual fund
evaluation, and event studies. For many purposes (such as in developing
asset pricing models and evaluationg mutual fund performance), it is
important to separate systematic from non-systematic factors. There have
been numerous attempts to examine the number and type of systematic
factors in equity returns. The purpose of this study is to determine the
systematic factors by examining mutual fund returns. One important
implication of modern portfolio theory is that, given a belief about
systematic factors, an investor should select an exposure (beta) to each
factor, a level of expected risk-adjusted return (alpha) and a level of
residual risk (residual variance). The mutual fund industry has an
incentive to offer an array of exposures to systematic factors in order
to meet investors' differing objective functions. Therefore, mutual
funds provide a logical way to obtain portfolios which have spread on
the characteristics of interest while smothering much of the noise
inherent when a model is fitted to individual security returns. |
| URI: | http://hdl.handle.net/2451/26675 |
| Appears in Collections: | Finance Working Papers
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