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The Outperformance Probability of Mutual Funds

Author

Listed:
  • Gabriel Frahm

    (Chair of Applied Stochastics and Risk Management, Department of Mathematics and Statistics, Helmut Schmidt University, 22043 Hamburg, Germany)

  • Ferdinand Huber

    (Chair of Applied Stochastics and Risk Management, Department of Mathematics and Statistics, Helmut Schmidt University, 22043 Hamburg, Germany)

Abstract

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.

Suggested Citation

  • Gabriel Frahm & Ferdinand Huber, 2019. "The Outperformance Probability of Mutual Funds," JRFM, MDPI, vol. 12(3), pages 1-29, June.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:3:p:108-:d:243051
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    References listed on IDEAS

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    2. David Edmund Allen & Elisa Luciano, 2019. "Risk Analysis and Portfolio Modelling," JRFM, MDPI, vol. 12(4), pages 1-4, September.

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