Portfolio Performance: Factors or Benchmarks?

26 Pages Posted: 26 Jul 2005

Date Written: June 30, 2005

Abstract

The suitability of using factors or benchmarks to measure portfolio performance is analyzed. 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 non-negativity restrictions. Selection of the replicate benchmark has a more important effect than the model type chosen.

Keywords: Performance, portfolio, Fama and French, benchmark, mutual funds

JEL Classification: G12, G23

Suggested Citation

Matallín Sáez, Juan Carlos, Portfolio Performance: Factors or Benchmarks? (June 30, 2005). Available at SSRN: https://ssrn.com/abstract=760204 or http://dx.doi.org/10.2139/ssrn.760204

Juan Carlos Matallín Sáez (Contact Author)

Universitat Jaume I ( email )

Campus del Riu Sec
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain
+34 964 728 568 (Phone)
+34 964 728 565 (Fax)

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