Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity

Wayne Ferson () and Jerchern Lin

No 19349, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The literature has not unambiguously established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. However, when alpha is defined using the client's marginal utility function, a client faced with a positive alpha would generally want to buy. When markets are incomplete performance measurement is inherently investor specific, and investors will disagree about the attractiveness of a given fund. We provide empirical bounds on the expected disagreement with a traditional alpha and study the cross sectional effects of disagreement and investor heterogeneity on the flow response to past fund alphas. The effects are both economically and statistically significant.

JEL-codes: G11 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-upt
Note: AP
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Citations: View citations in EconPapers (1)

Published as WAYNE FERSON & JERCHERN LIN, 2014. "Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity," The Journal of Finance, vol 69(4), pages 1565-1596.

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