A comparison of single factor and multiple factor alphas used in measuring mutual fund performance
DOI:
https://doi.org/10.61190/fsr.v22i4.4662Keywords:
Performance evaluation, Mutual funds, Financial planningAbstract
We compare mutual fund alphas computed using single factor models commonly used by practitioners with the alphas computed using the multifactor models common in academic research. Although all methods seek to control for a fund's investing style, single-factor alphas exceed multifactor alphas by 50-75 basis points per year on average, with the biggest differences concentrated in small cap funds. Although good performance does not tend to persist, single-factor alphas are about twice as likely to show persistence compared to three- and four-factor alphas. Investors should add multifactor alphas to the set of information used to evaluate mutual funds.
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