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What risk factors matter to investors?

I seminarserien Økonomi og finans vil professor Terrance Odean fra UC Berkeley presentere sin artikkel: What risk factors matter to investors? Evidence from mutual fund flows. Seminaret er åpent for alle interesserte.

Seminaret finner sted på Handelshøgskolen ved UiS i Ellen & Axel Lunds hus rom H-125 kl 11:30-12:30.

When selecting an actively managed equity fund, investors seek to identify fund managers who are able to generate positive risk-adjusted performance (alpha). To assess risk-adjusted performance, investors must apply a model of risk when ranking funds; thus, we can infer the risk model that investors use by the fund choices that they make. Based on this observation, we analyze the sensitivity of fund flows to alphas calculated using competing models of risk: market-adjusted returns, the Capital Asset Pricing Model (CAPM), the Fama-French three-factor model (which adds size and value factors), and

the Carhart four-factor model (which adds a momentum factor). We first find that the CAPM-based alpha better explains fund flows than the three- or four-factor alphas. We then decompose fund performance into five categories – (1) four-factor alpha and returns that can be traced to the (2) market (beta), (3) size, (4) value, and (5) momentum tilts of the fund. We find that investors are most sensitive to a fund’s alpha. Fund returns that can be traced to size, value, or momentum are discounted, but not much (with sensitivities ranging from 67-84% of that observed for alpha). However, fund returns

that can be traced to the market beta of the fund are heavily discounted (with a sensitivity less than 25% of that observed for alpha). These results indicate that investors care about market risk when evaluating mutual funds, but most do not treat factor returns as compensation for risk when evaluating the performance of actively managed mutual funds.

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