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Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity

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  • Wayne E. Ferson
  • Jerchern Lin

Abstract

The literature has not unambiguously established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. However, when alpha is defined using the client's marginal utility function, a client faced with a positive alpha would generally want to buy. When markets are incomplete performance measurement is inherently investor specific, and investors will disagree about the attractiveness of a given fund. We provide empirical bounds on the expected disagreement with a traditional alpha and study the cross sectional effects of disagreement and investor heterogeneity on the flow response to past fund alphas. The effects are both economically and statistically significant.

Suggested Citation

  • Wayne E. Ferson & Jerchern Lin, 2013. "Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity," NBER Working Papers 19349, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19349
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    Cited by:

    1. Jackwerth, Jens Carsten & Slavutskaya, Anna, 2016. "The total benefit of alternative assets to pension fund portfolios," Journal of Financial Markets, Elsevier, vol. 31(C), pages 25-42.

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    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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