Are mutual fund managers selecting the right benchmark index?

Authors

  • Bruce A. Costa Department of Finance, School of Business Administration, The University of Montana
  • Keith Jakob Department of Finance, School of Business Administration, The University of Montana

DOI:

https://doi.org/10.61190/fsr.v20i2.4697

Keywords:

Benchmark index, Mutual funds, Performance

Abstract

In this paper, we determine index suitability for mutual funds that specify the S&P 500 as their performance benchmark. Using a four-factor model, we calculate factor loadings for mutual funds and their benchmark index and measure deviations with respect to the risk factors in the model. We sort the funds into growth and value subsets. By comparing each fund with the appropriate growth or value index, we show that the inferences regarding abnormal fund performance change dramatically. Our results indicate that fine tuning of abnormal performance measurement can significantly alter infer­ ences regarding the fund manager's contribution to mutual fund performance. Using this methodol­ ogy, investors and academics can more accurately assess mutual fund manager performance relative to an appropriate benchmark, regardless of the target index selected by the management of the mutual fund.

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Published

2011-06-30

How to Cite

Costa, B. A., & Jakob, K. (2011). Are mutual fund managers selecting the right benchmark index?. Financial Services Review, 20(2), 129–143. https://doi.org/10.61190/fsr.v20i2.4697

Issue

Vol. 20 No. 2 (2011): FSR Summer 2011

Section

New Original Submission

License

Copyright (c) 2011 Academy of Financial Services

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