The sources of portfolio volatility and mutual fund performance

Nima Vafai and David Rakowski

International Review of Financial Analysis, 2024, vol. 91, issue C

Abstract: We conduct a volatility decomposition to identify the source of performance differences between low volatility and high volatility mutual funds. Higher return covariances between fund holdings are associated with more fund-level exposure to the idiosyncratic volatility effect. The average security-level variance of fund holdings is only weakly associated with idiosyncratic volatility but is closely tied to a fund's exposure to the beta anomaly. We demonstrate that our measure of the within-portfolio covariance of fund holdings is useful in evaluating fund-level performance measures and exposure to volatility anomalies.

Keywords: Mutual funds; Return volatility; Fund manager skill; beta anomaly; Market efficiency; Portfolio performance; Return covariance; Mutual fund holdings (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G20 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:91:y:2024:i:c:s105752192300501x

DOI: 10.1016/j.irfa.2023.102985

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