Kimball's Prudence and Two-Fund Separation as Determinants of Mutual Fund Performance Evaluation

Kredit und Kapital, 2007

Posted: 20 Aug 2007

See all articles by Wolfgang Breuer

Wolfgang Breuer

RWTH Aachen University

Marc Gürtler

University of Braunschweig - Institute of Technology, Department of Finance

Abstract

We consider investors with mean-variance-skewness preferences who aim at selecting one out of F different funds and combining it optimally with the riskless asset and direct stock holdings. Direct stock holdings are either exogenously or endogenously determined. In our theoretical section, we derive and discuss several performance measures for the investor's decision problems with a central role of Kimball's (1990) prudence and of several variants of Sharpe and Treynor measures. In our empirical section, we show that the distinction between exogenous and endogenous stock holding is less important than the issue of skewness preferences. The latter are most relevant for fund rankings, when an investor's skewness preferences are not derived from cubic HARA utility so that the two-fund separation theorem is not valid.

Keywords: investor specific performance measure, performance evaluation, prudence, skewness preferences

JEL Classification: G11

Suggested Citation

Breuer, Wolfgang and Gürtler, Marc, Kimball's Prudence and Two-Fund Separation as Determinants of Mutual Fund Performance Evaluation. Kredit und Kapital, 2007, Available at SSRN: https://ssrn.com/abstract=1007734

Wolfgang Breuer (Contact Author)

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Marc Gürtler

University of Braunschweig - Institute of Technology, Department of Finance ( email )

Abt-Jerusalem-Str. 7
Braunschweig, 38106
Germany

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