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Portfolio performance: factors or benchmarks?

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  • Juan Matallin-Saez

Abstract

The suitability of using factors or benchmarks to measure portfolio performance is analysed. Fama and French factors are constructed from Russell US stock indexes and then directly utilized as benchmarks. The interpretation of factors as zero-investment benchmarks makes it difficult to explain performance measurement as the comparison of active versus passive management, given the short selling restrictions often applied to mutual funds. Empirical results reveal similar biases in extended Jensen's alphas in models with both factors and with benchmarks and with convexity and nonnegativity restrictions. Selection of the benchmarks has a more important effect than the model type chosen.

Suggested Citation

  • Juan Matallin-Saez, 2007. "Portfolio performance: factors or benchmarks?," Applied Financial Economics, Taylor & Francis Journals, vol. 17(14), pages 1167-1178.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:14:p:1167-1178
    DOI: 10.1080/09603100600771026
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    References listed on IDEAS

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    Cited by:

    1. Romana Bangash, 2011. "Evaluation of European Mutual funds Performance," Post-Print halshs-00658484, HAL.
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    3. Witkowska Dorota, 2012. "Measurement of the Efficiency of Mutual Funds Operating on the Pan-European Market," Folia Oeconomica Stetinensia, Sciendo, vol. 12(2), pages 126-146, December.
    4. Mateus, Irina B. & Mateus, Cesario & Todorovic, Natasa, 2019. "Review of new trends in the literature on factor models and mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 344-354.

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