Author

  • Yudhvir Seetharam

    • University of the Witwatersrand, South Africa
    • South Africa

  • Christo Auret

    • University of the Witwatersrand, South Africa
    • South Africa

Abstract

Decision theory is concerned with identifying values and uncertainties in a given decision that result in the optimal outcome (Wald, 1939). It is one of the core aspects of any financial or investment decision. We consider the case where the investor has the choice between a passive index (such as a market index) and an actively managed mutual fund. Our analysis aims to determine which option an investor will choose based on a statistical ranking method known as stochastic dominance. We then evaluate this choice against the background information supplied by the mutual fund to ascertain whether the choice given by stochastic dominance is indeed in line with the investor profile given by the mutual fund. It is found that of the 11 mutual funds examined over the sample period of April 2006 to April 2013, only 4 attract the correct type of investor, 3 attract a mixture of investors and 4 attract (arguably) the wrong type of investor.

Keywords

References

  • Davidson, R. & Duclous, J. Y. (2000). Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality. Econometrica, 68, 1435-1464.
  • Fama, E. (1965). Random Walks in Stock Market Prices. Financial Analysts Journal , 21(5), 55-59.
  • Fong, W., Wong, W. & Lean, H. (2005). International momentum strategies: a stochastic dominance approach. Journal of Financial Markets , 8(1), 89-109.
  • Friedman, M. & Savage, L. (1948). The Utility of Choices Involving Risk. Journal of Political Economy, 56 (4), 279-304.
  • Hadar, J. & Russell, W. (1969). Rules for Ordering Uncertain Prospects. American Economic Review, 59, 2534.
  • Hanoch, G. & Levy, H. (1969). The Efficiency Analysis of Choices Involving Risk. Review of Economic Studies , 36, 335-346.
  • Kahneman, D. & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica , 47(2), 263-291.
  • Kendall, M. (1953). The Analysis of Time Series Economics Part 1: Prices. Journal of the Royal Statistical Society , 116(1), 11-34.
  • Levy, H. (1992). Stochastic Dominance and Expected Utility: Survey and Analysis. Journal of Management Science, 38(4), 555-593.
  • Linton, O., Massoumi, E. & Whang, Y. (2005). Consistent Testing for Stochastic Dominance: A Subsampling Approach. Review of Economic Studies, 72(3), 735-765.
  • Lo, A. (2004). Reconciling Efficient Markets with Behavioral Finance: The Adaptive Markets Hypothesis. Journal of Investment Consulting, 7(1), 21-44.
  • Lo, A. (2005). The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective. Journal of Portfolio Management, 30(1), 15-29.
  • Lopes, L. (1987). Between Hope and Fear: The Psychology of Risk. Advances in Experimental Social Psychology , 20, 255-295.
  • Malkiel, B. (2005). Reflections on the Efficient Markets Hypothesis: 30 Years Later. Financial Review , 40 , 1-9.
  • Markowitz, H. (1952a). The Utility of Wealth. Journal of Political Economy , 60, 151-156.
  • Markowitz, H. (1959). Portfolio Selection: Efficient Diversification of Investments. John Wiley and Sons.
  • Porter, R. (1974). Semi Variance and Stochastic Dominance: A Comparison. American Economic Review , 64, 200-204.
  • Pratt, J. & Zeckhauser, R. (1987). Proper Risk Aversion. Econometrica, 55, 143-154.
  • Roberts, H. (1959). Stock Market "Patterns" and Financial Analysis: Methodological Suggestions. Journal of Finance, 14(1), 1-10.
  • Rothschild, M. & Stiglitz, J. (1970). Increasing Risk: 1. A Definition. Journal of Theory , 2, 225-243.
  • Seetharam, Y. & Auret, C. (2013). Fusion Investing: An esoteric approach to portfolio formation. Unpublished.
  • Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance , 19(3), 425-442.
  • Todea, A., Ulici, M. & Silaghi, S. (2009). The Adaptive Markets Hypothesis: Evidence from Asia-Pacfic Financial Markets, Review of Finance and Banking , 2, 7-13
  • Tversky, A. & Kahneman, D. (1992). Advances in Prospect Theory: Cumulative Representations of Uncertainty. Journal of Risk and Uncertainty , 5, 297-323.
  • von Neumann, J. & Morgenstern, O. (1944). Theory of Games and Economic Behaviour. Princeton University Press.
  • Vose. (2011). Model Risk 4.0. Belgium.
  • Wald, A. (1939). Contributions to the Theory of Statistical Estimation and Testing Hypotheses. Annals of Mathematical Statistics , 10(4), 299-326.
  • Whitmore, G. (1970). Third Degree Stochastic Dominance. American Economic Review , 60, 457-459.

Downloads

No downloads have been recorded for this article yet. Figures appear here once readers begin downloading the full text.

How to Cite

Seetharam, Y., & Auret, C. (2013). Do Mutual Funds Attract the Right Investor? A Stochastic Dominance Approach. Journal of Economics and Behavioral Studies, 5(12), 905-914. https://doi.org/10.22610/jebs.v5i12.463

Share this article

License

Copyright (c) 2013 Yudhvir Seetharam, Christo Auret (Author)

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of revised paper in the light of suggestions of the reviewers, the editorial team  edits and formats manuscripts to bring uniformity and standardization in published material.

This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.

Keywords

Section

Research Paper

Published in

Vol. 5 No. 12 (2013) Portfolio Evaluation, Leadership & Knowledge Management View issue contents

Published

2013-12-30

Submissions

Have research to publish? Journal of Economics and Behavioral Studies welcomes submissions.

Make a Submission