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| Author: | Palomino, F. Uhlig, H. |
| Title: | Should smart investors buy funds with high past returns? |
| Journal: | Review of finance
2007 : MAR, VOL. 11:1, p. 51-70 |
| Index terms: | finance investments risk management portfolio management rate of return models |
| Language: | eng |
| Abstract: | In this study, equilibria are characterized in a game btw. a fund manager of unknown ability controlling the riskiness of his portfolio (henceforth as: p-f.) and investors (here as: invtrs.) only observing realized returns. Two types of equilibria are derived. For the first type: i. invtrs. invest in the fund in case the realized return falls within some interval, ii. a good manager (here as: g-m.) picks a p-f. of minimal riskiness, and iii. a bad manager (as: b-m.) picks a p-f. with higher risk, "gambling" on a lucky outcome. For the second type: i. invtrs. invest in the fund if the observed return is larger than some threshold, and ii. both g-m. and b-m. choose the same risk level. |
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