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| Author: | Pastor, L. Stambaugh, R.F. |
| Title: | Investing in equity mutual funds |
| Journal: | Journal of Financial Economics
2002 : MAR, VOL. 63:3, p. 351-380 |
| Index terms: | Stock markets Unit trusts Investment Portfolio selection USA |
| Language: | eng |
| Abstract: | This study constructs 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 non-benchmark indexes, pricing-model inaccuracy from managerial skill is distinguished. 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. The large universe of funds offers no close substitutes for the Fama-French and momentum benchmarks. |
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