The relation between mean-variance efficiency and arbitrage pricing

Article Abstract:

Arbitrage pricing research that focuses on mean-variance efficiency in a reference portfolio environment and linear pricing in a multibeta setting introduces the concept of local mean-variance efficiency. According to this concept, reference portfolios price all assets that are locally efficient. This is somewhat in opposition to the capital asset pricing model, which implies that only market portfolios can exhibit such efficiency. Arbitrage pricing theory is also examined for testability, leading to the assumption that factor analysis portfolios may be locally efficient. The arbitrage pricing theory is shown to be more testable than the capital asset pricing model, and reasons for this are pursued.

Models, Prices and rates, Securities, Investments, Securities prices, Finance, Capital assets pricing model, Capital asset pricing model, Arbitrage

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Adverse risk incentives and the design of performance-based contracts

Article Abstract:

Current performance-based fee contracts are analyzed using option pricing theory. Performance-based fee contracts are examined because they may induce portfolio managers to adopt adverse risk management practices for the portfolios in their care. Contract parameters for inducing proper risk incentives are presented for various classes of investment strategies. When rewards for good performance are outweighed by penalties for bad performance adverse risk incentives are avoided in buy-and-hold and rebalancing strategies.

Management science, Risk management, Contracts

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Mutual fund performance: an analysis of quarterly portfolio holdings

Article Abstract:

An estimate of gross mutual fund return performance is estimated from the 1975-84 quarterly holdings of sample of mutual funds. The sample is used in conjunction with a sample that has actual net returns. The technique allows for the estimation of total transaction costs, the measured performance bias associated with the survival requirement, and abnormal performance. Results indicate that some of the funds had positive risk-adjusted gross returns.

Mutual funds, Management research

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