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10 Conclusions.

We have reviewed the models and methods for measuring portfolio performance and the evidence on the performance of professionally managed investment portfolios. Our review includes traditional measures, their properties and some of the important problems associated with the early measures. We also reviewed the more recent Conditional Performance Evaluation literature, weight-based performance measures and the stochastic discount factor approach, along with the evidence that these newer measures have produced. Our discussion has touched on equity style mutual funds, pension funds, asset allocation style funds, fixed income funds, and hedge funds. We draw several broad conclusions about the evidence that the literature has produced on fund performance, its relation to the efficiency of the markets, and also about future directions that we would like the literature to take.

We have defined investment performance at two broad levels. A fund or manager has investment ability if it generates returns that can be expected to exceed that of an otherwise equivalent benchmark, before costs and fees. But a fund may dissipate its ability through trading costs or capture the rents to its ability through management fees. A fund that outperforms the otherwise equivalent benchmark on an after-cost basis is said to add value for investors.

One underdeveloped area in the performance measurement literature is fixed income fund performance. There are many interesting methodological issues here, including which models and factors to use and the effects of interim trading and illiquidity on the performance measures. Finally, we think that future research needs to be more careful about the effects of costs and taxes in the evaluation of managed portfolio returns.

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Title Annotation:Portfolio Performance Evaluation
Author:Aragon, George O.; Ferson, Wayne E.
Publication:Foundations and Trends in Finance
Article Type:Brief article
Geographic Code:1USA
Date:Apr 1, 2006
Previous Article:9 A summary: the evidence on managed portfolio performance and market efficiency.
Next Article:References.

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