Differences in Fund Trackers’ Performance Rankings: A Mean-Variance Perspective

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Fund tracking firms use seemingly unrelated, historical returns-based performance measures when ranking the performance of mutual funds. Mean-standard deviation (i.e., “Modern Portfolio Theory”) approximations are used to characterize their different implicit weightings of fund returns’ means and standard deviations. As a result of the different weightings, performance rankings computed with actual mutual fund returns can and do differ along important dimensions, despite the fact that they all reward high mean and penalize standard deviation.

Author: Michael Jay Stutzer, Ph.D., University of Colorado

Fund tracking firms use seemingly unrelated, historical returns-based performance measures when ranking the performance of mutual funds.  Mean-standard deviation (i.e., "Modern Portfolio Theory") approximations are used to characterize their different implicit weightings of fund returns' means and standard deviations.  As a result of the different weightings, performance rankings computed with actual mutual fund returns can and do differ along important dimensions, despite the fact that they all reward high mean and penalize standard deviation.

 

Differences in Fund Trackers' Performance Rankings: A Mean-Variance Perspective

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