Alternative Model to Evaluate Selectivity and Timing Performance of Mutual Fund Managers: Theory and Evidence


This chapter empirically examines the selectivity, market timing, and overall performance of equity funds in the United States from January 1990 to September 2005. We first used the Sharpe, Treynor, and Jensen measures to evaluate the selectivity performance of mutual fund managers. In addition, we also used the Treynor-Mazuy, Henriksson-Merton, and Lee-Rahman models to evaluate the selectivity and timing performance of mutual fund managers. Based on these measures and models, we found that about one-third of funds had significant positive selectivity ability. In addition, we also found that some funds have timing ability for the mutual fund managers. Nevertheless, without considering the transaction costs and taxes, the actual investment for most mutual funds compared to a passive investment strategy still appears to take the lead.


Mutual Fund Systematic Risk Excess Return Fund Manager Capital Asset Price Model 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bhattacharya, S., and P. Pfleiderer, “A Note on Performance Evaluation.” Technical Report 714, Stanford, CA: Stanford University, Graduate School of Business (1983).Google Scholar
  2. Brinson, G. P., B. D. Singer, and G. L. Beebower, “Determinants of Portfolio Performance II: An Update.” Financial Analysts Journal 47, 40–48 (1991).CrossRefGoogle Scholar
  3. Fama, E. F., “Components of Investment Performance.” Journal of Finance 27, 551–567 (1972).CrossRefGoogle Scholar
  4. Grant, D., “Portfolio Performance and the Cost of Timing Decisions.” Journal of Finance 32, 837–846 (1977).CrossRefGoogle Scholar
  5. Henriksson, R. D., and R. C. Merton, “On Market Timing and Investment Performance. II. Statistical Procedure for Evaluating Forecasting Skills.” Journal of Business 54, 513–534 (1981).CrossRefGoogle Scholar
  6. Jensen, M.C., “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance 23, 389–416 (1968).CrossRefGoogle Scholar
  7. Jensen, M. C., “Optimal Utilization of Market Forecasts and the Evaluation of Investment Performance.” In G. P. Szego and K. Shell(eds.), Mathematical Methods in Investment and Finance. Amsterdam: Elsevier (1972).Google Scholar
  8. Lee C. F., and S. Rahman, “Market Timing, Selectivity, and Mutual Fund Performance: An Empirical Investigation.” Journal of Business 63, 261–278 (1990).Google Scholar
  9. Markowitz, H., “Portfolio Selection.” Journal of Finance 7, 77–91 (1952).CrossRefGoogle Scholar
  10. Merton, R. C., “On Market Timing and Investment performance. I. An Equilibrium Theory of Value for Market Forecasts.” Journal of Business 54, 363–406 (1981).CrossRefGoogle Scholar
  11. Roll, R., “A Critique of the Asset Pricing Theory’s Tests, Part I: On Past and Potential Testability of the Theory.” Journal of Financial Economics 4, 126–176 (1977).CrossRefGoogle Scholar
  12. Sharpe, W. F., “Mutual Fund Performance.” Journal of Business 39, 119–138 (1966).CrossRefGoogle Scholar
  13. Stambaugh, R. F., “On the Exclusion of Assets from Tests of the Two-Parameter Model: A Sensitivity Analysis.” Journal of Financial Economics 10, 237–268 (1982).CrossRefGoogle Scholar
  14. Treynor, J. L., “How to Rate Management of Investment Funds.” Harvard Business Review 13, 63–75 (1965).Google Scholar
  15. Treynor, J. L., and K. K. Mazuy, “Can Mutual Funds Outguess the Market?” Harvard Business Review 44, 131–136 (1966).Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.PiscatawayUSA
  2. 2.BostonUSA
  3. 3.Department of FinanceFeng Chia UniversityTaiwanRepublic of China.

Personalised recommendations