The evaluation of active manager returns in a non-symmetrical environment
This paper examines the moments of the active return distributions ofinvestment managers. While modern portfolio theory assumes asset return distributionsare Gaussian normal, the empirical evidence overwhelmingly documents asset returns tobe leptokurtic and fat tailed. In addition, the evaluation of investment managerperformance has relied almost exclusively on the Capital Asset Pricing Model (CAPM),which assumes investors are only concerned with the interaction between the first andsecond moments of a return distribution - mean and variance. Little empirical workexists, however, evaluating the implications for performance measurement methods oftaking into account the higher moments of active return distributions - namelyskewness and kurtosis. This paper takes up this issue with respect to the performanceof funds invested in domestic equities, domestic fixed interest and international equitiessectors on behalf of investors in Australia, Canada, Japan, the UK and the US. First,the paper documents actlve fund returns distributions to be inconsistent with aGaussian normal distribution, confirming previous studies examining asset returns.Secondly, the paper demonstrates the usefulness of the higher moments of fund activereturn distributions in evaluating portfolio performance and risk. Thirdly, the paperfurther extends the performance measures to take account of the investors' differentialpreference between added value in rising and falling markets. It concludes that morework needs to be done in all of these areas, but this paper provides a very useful stepalong the way.
Year of publication: |
2005
|
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Authors: | Gallagher David ; Bird Ronald |
Publisher: |
International Water Association |
Saved in:
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