Benchmark versus Index in Mutual Fund Performance Evaluation

The adequate evaluation of mutual fund performance and of the fund managers’ ability to add value is an issue to which it has been given special attention in the recent financial literature. One of the traditional evaluation measures most commonly used is Carhart's alpha. However, one of the main problems of the evaluation methods that use the beta of the portfolios as a measure of risk and, therefore, Carhart's alpha is its sensitivity to the definition of the market portfolio. In this work we study the importance of defining the market portfolio using Carhart's alpha for a sample of UK mutual funds, and the influence of this market portfolio in the funds´ excess returns and in the performance ranking classification of the fund sample