Kimball’s Prudence and Two-Fund Separation as Determinantsof Mutual Fund Performance Evaluation

We consider investors with mean-variance-skewness preferences who aim at selecting oneout of F different funds and combining it optimally with the riskless asset and direct stock holdings.Direct stock holdings are either exogenously or endogenously determined. In our theoretical section,we derive and discuss several performance measures for the investor’s decision problems with a centralrole of Kimball’s (1990) prudence and of several variants of Sharpe and Treynor measures. In ourempirical section, we show that the distinction between exogenous and endogenous stock holding isless important than the issue of skewness preferences. The latter are most relevant for...