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Performance Evaluation and Attribution of Security Portfolios by Russ Wermers, Bernd R. Fischer

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Chapter 7

Fund Manager Selection Using Macroeconomic Information

Abstract

It is rare for a fund manager to outperform her benchmarks during all types of market conditions, such as expansions vs. recessions or technology stock vs. financial stock booms. Accordingly, we should look for managers who have outperformed during historical economic conditions that are similar to current conditions for the best chance of finding today’s skilled managers. This chapter presents a Bayesian system for predicting managed fund alphas, and for selecting portfolios of fund managers, using information on the macro economy. To illustrate the approach, this chapter applies the system to the choice of U.S. open-end, domestic equity mutual funds over the 1975 to 2002 ...

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