Decomposing mutual fund alpha into security selection and security weighting

Jeffrey R. Stark

Journal of Empirical Finance, 2019, vol. 52, issue C, 76-91

Abstract: I decompose mutual fund alpha into two components: which stocks a mutual fund selects and what weights are placed in those stocks. Although related, each decision has a distinguishable impact on portfolio alpha. I show that deciding how to weight securities is of greater importance than deciding which securities to select. The ability to generate weighting alpha persisting for 12 months while the ability to generate selecting alpha persists for just one. Finally, the performance of mutual funds that both accurately weight and select securities persists for one month and results in significant outperformance.

Keywords: Mutual fund; Alpha; Portfolio weighting; Portfolio selection (search for similar items in EconPapers)
JEL-codes: G11 G20 G23 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:52:y:2019:i:c:p:76-91

DOI: 10.1016/j.jempfin.2019.03.001

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