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The Elusive “Stock-Picker’s Market”: Dispersion and Mutual Fund Performance

By Jacob Epstein  

This paper explores the relationship between active mutual fund performance and market dispersion from January 1990 to December 2018. I find a significant positive relationship between dispersion and 4-factor alpha overall, providing some evidence of managerial skill. There are large differences in this relationship by decade and fund selectivity. The results suggest active mutual funds were able to take advantage of stock-picking opportunities during the 1990s and 2000s, particularly the most active subset of funds. However, I find a significant negative relationship between dispersion and alpha for funds in the 2010s, indicating this relationship has changed over time. I discuss several possible explanations for this reversal, which could present interesting avenues for further research.

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Advisors: Professor Emma Rasiel | JEL Codes: G1, G12, G23

An Analysis of Passive and Active Bond Mutual Fund Performance

By Michael J. Kiffel

The literature on the performance differential between passively and actively managed equity mutual funds is thorough: passively managed funds generally outperform their active counterparts except in the rare presence of highly-skilled managers. However, there exists limited academic research regarding fixed income mutual funds. This study utilizes the Fama-French bond risk factors, TERM and DEF, in a dual-step multivariate linear regression analysis to determine this performance differential between passively and actively managed bond mutual funds. The funds are comprised of either corporate or government bonds, spanning three categorizations of average maturities. Overall, it is determined that passively managed bond funds offer higher net returns than those offered by actively managed funds. Additionally, the regressions demonstrated that DEF possesses a high degree of predictive power and statistical

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Advisor: Edward Tower | JEL Codes: C55, G10, G11

Do Vanguard ETF Investors Make Good Decisions? – Testing the Bogle Hypothesis

By Meng Xie

John Bogle, the founder of Vanguard, is a notable opponent of frequent ETF trading. We test his
hypothesis that Vanguard investors are not trading ETFs intelligently. A comparison of dollarweighted
and time-weighted returns is the typical method used for assessing investor timing. We
instead employ Sharpe’s style analysis techniques to compare the returns of a portfolio of ETFs
to a basket of standard Vanguard funds that mimics the ETF portfolio’s pattern of returns. We
find that the ETF portfolio underperforms the standard Vanguard funds, providing empirical
evidence supporting Bogle’s view that ETFs are misused.

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Advisor: Edward Tower | JEL Codes: G11 | Tagged: Exchange-traded funds, Investment, Mutual funds, Vanguard


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