The Outperformance Probability of Mutual Funds
Chair of Applied Stochastics and Risk Management, Department of Mathematics and Statistics, Helmut Schmidt University, 22043 Hamburg, Germany
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J. Risk Financial Manag. 2019, 12(3), 108; https://doi.org/10.3390/jrfm12030108
Received: 5 May 2019 / Revised: 17 June 2019 / Accepted: 19 June 2019 / Published: 26 June 2019
(This article belongs to the Special Issue Risk Analysis and Portfolio Modelling)
We propose the outperformance probability as a new performance measure, which can be used in order to compare a strategy with a specified benchmark, and develop the basic statistical properties of its maximum-likelihood estimator in a Brownian-motion framework. The given results are used to investigate the question of whether mutual funds are able to beat the S&P 500 or the Russell 1000. Most mutual funds that are taken into consideration are, in fact, able to beat the market. We argue that one should refer to differential returns when comparing a strategy with a given benchmark and not compare both the strategy and the benchmark with the money-market account. This explains why mutual funds often appear to underperform the market, but this conclusion is fallacious.
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Keywords:
exchange traded funds; inverse coefficient of variation; mutual funds; outperformance probability; performance measurement; Sharpe ratio
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MDPI and ACS Style
Frahm, G.; Huber, F. The Outperformance Probability of Mutual Funds. J. Risk Financial Manag. 2019, 12, 108. https://doi.org/10.3390/jrfm12030108
AMA Style
Frahm G, Huber F. The Outperformance Probability of Mutual Funds. Journal of Risk and Financial Management. 2019; 12(3):108. https://doi.org/10.3390/jrfm12030108
Chicago/Turabian StyleFrahm, Gabriel; Huber, Ferdinand. 2019. "The Outperformance Probability of Mutual Funds" J. Risk Financial Manag. 12, no. 3: 108. https://doi.org/10.3390/jrfm12030108
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