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The sources of portfolio volatility and mutual fund performance

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  • Vafai, Nima
  • Rakowski, David

Abstract

We conduct a volatility decomposition to identify the source of performance differences between low volatility and high volatility mutual funds. Higher return covariances between fund holdings are associated with more fund-level exposure to the idiosyncratic volatility effect. The average security-level variance of fund holdings is only weakly associated with idiosyncratic volatility but is closely tied to a fund's exposure to the beta anomaly. We demonstrate that our measure of the within-portfolio covariance of fund holdings is useful in evaluating fund-level performance measures and exposure to volatility anomalies.

Suggested Citation

  • Vafai, Nima & Rakowski, David, 2024. "The sources of portfolio volatility and mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finana:v:91:y:2024:i:c:s105752192300501x
    DOI: 10.1016/j.irfa.2023.102985
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    More about this item

    Keywords

    Mutual funds; Return volatility; Fund manager skill; beta anomaly; Market efficiency; Portfolio performance; Return covariance; Mutual fund holdings;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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