In this paper I derive a risk-adjusted measure of portfolio performance (now known as "Jensen's Alpha") that estimates how much a manager's forecasting ability contributes to the fund's returns. The measure is based on the theory of the pricing of capital assets by Sharpe (1964), Lintner (1965a) and Treynor (Undated). I apply the measure to estimate the predictive ability of 115 mutual fund managers in the period 1945-1964—that is their ability to earn returns which are higher than those we would expect given the level of risk of each of the portfolios. The foundations of the model and the properties of the performance measure suggested here are discussed in Section II. The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-marketand-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their bookkeeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses. Keywords: Jensen's Alpha, mutual fund performance, risk-adjusted returns, forecasting ability, predictive ability.

The Pareto (power-law) wealth distribution, which is empirically observed in many countries, implies rather extreme wealth inequality. For instance, in the U.S. the top 1% of the population holds about 40% of the total wealth. What is the source of this inequality? The answer to this question has profound political, social, and philosophical implications. We show that the Pareto wealth distribution is a robust consequence of a fundamental property of the capital investment process: it is a stochastic multiplicative process. Moreover, the Pareto distribution implies that inequality is driven primarily by chance, rather than by differential investment ability. This result is closely related to the concept of market efficiency, and may have direct implications regarding the economic role and social desirability of wealth inequality. We also show that the Pareto wealth distribution may explain the Lvy distribution of stock returns, which has puzzled researchers for many years. Thus, the Pareto wealth distribution, market efficiency, and the Lvy distribution of stock returns are all closely linked.