## The performance of mutual funds in the period 1945-1964 (1968)

Venue: | Journal of Finance |

Citations: | 366 - 0 self |

### BibTeX

@ARTICLE{Jensen68theperformance,

author = {Michael C. Jensen and Michael C. Jensen},

title = {The performance of mutual funds in the period 1945-1964},

journal = {Journal of Finance},

year = {1968},

volume = {23},

pages = {389--416}

}

### Years of Citing Articles

### OpenURL

### Abstract

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.

### Citations

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(Show Context)
Citation Context ...manager’s forecasting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; Dietz, 1966; Farrar, 1962; Friend et al., 1962; Friend and Vickers, 1965; Horowitz, 1965; =-=Sharpe, 1966-=-; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to the measure suggested by Treynor (1965).sJensen 3 1967 (... |

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Citation Context ...their brokerage expenses. Keywords: Jensen's Alpha, mutual fund performance, risk-adjusted returns, forecasting ability, predictive ability. Journal of Finance, Vol. 23, No. 2 (1967) 389-416. © M. C. =-=Jensen 1967-=- This document is available on the Social Science Research Network (SSRN) Electronic Library at: http://papers.ssrn.com/ABSTRACT=244153sThe Performance Of Mutual Funds In The Period 1945-1964* Michael... |

54 |
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Citation Context ...are independently distributed random variables with E( e ˜ jt) = 0, and empirical evidence indicates that the 2 roughly of the same order of magnitude as s ( ˜ ( ) are 2 s e ˜ j p ) (cf. (Fama, 1968; =-=King, 1966-=-)). Hence the variance of the last term on the right hand side of (3), given by Ê Ë ˆ ¯ ( ) 2 s Á Â X j e ˜ j˜ = j j 2 2 Â X s e ˜ j j will be extremely small since on average X j will be equal to 1/ ... |

19 |
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(Show Context)
Citation Context ...cussed in detail in Jensen (1967). For purposes of brevity we confine ourselves here to an examination of a fund manager’s forecasting ability which is of interest in and of itself 2 See for example (=-=Cohen and Pogue, 1967-=-; Dietz, 1966; Farrar, 1962; Friend et al., 1962; Friend and Vickers, 1965; Horowitz, 1965; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested bel... |

14 | A linear programming algorithm for mutual fund portfolio selection - Sharpe - 1967 |

8 |
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(Show Context)
Citation Context ...casting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; Dietz, 1966; Farrar, 1962; Friend et al., 1962; Friend and Vickers, 1965; Horowitz, 1965; Sharpe, 1966; =-=Treynor, 1965-=-). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to the measure suggested by Treynor (1965).sJensen 3 1967 (witness the wid... |

7 |
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Citation Context ...or purposes of brevity we confine ourselves here to an examination of a fund manager’s forecasting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; Dietz, 1966; =-=Farrar, 1962-=-; Friend et al., 1962; Friend and Vickers, 1965; Horowitz, 1965; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quit... |

6 |
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Citation Context ...e that the first term on the right hand side of (3) is just E( ˜ Mt R where X j is the ratio of the total value R ), and since the market factor p is unique only up to a transformation of scale (cf. (=-=Fama, 1968-=-)) we can scale p such that Â jb = 1 and j X j the second term becomes just p . Furthermore by assumption, the e ˜ jt in the third term are independently distributed random variables with E( e ˜ jt) =... |

4 | The Efficient Market Model Applied to U.S. Treasury Bill Rates - ROLL - 1968 |

3 | The Assessment of Portfolio Performance - Blume - 1968 |

3 |
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Citation Context ...sen (1967). For purposes of brevity we confine ourselves here to an examination of a fund manager’s forecasting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; =-=Dietz, 1966-=-; Farrar, 1962; Friend et al., 1962; Friend and Vickers, 1965; Horowitz, 1965; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many... |

2 |
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(Show Context)
Citation Context ... brevity we confine ourselves here to an examination of a fund manager’s forecasting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; Dietz, 1966; Farrar, 1962; =-=Friend et al., 1962-=-; Friend and Vickers, 1965; Horowitz, 1965; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to ... |

2 |
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(Show Context)
Citation Context ...urselves here to an examination of a fund manager’s forecasting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; Dietz, 1966; Farrar, 1962; Friend et al., 1962; =-=Friend and Vickers, 1965-=-; Horowitz, 1965; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to the measure suggested by T... |

2 | and 1965. Investment Companies - Wiesenberger - 1955 |

1 | Risk, Return, and General Equilibrium in a Stable Paretian Market - Fama - 1967 |

1 |
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(Show Context)
Citation Context ...ation of a fund manager’s forecasting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; Dietz, 1966; Farrar, 1962; Friend et al., 1962; Friend and Vickers, 1965; =-=Horowitz, 1965-=-; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to the measure suggested by Treynor (1965).sJ... |

1 |
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(Show Context)
Citation Context ...itz, 1965; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to the measure suggested by Treynor =-=(1965)-=-.sJensen 3 1967 (witness the widespread interest in the theory of random walks and its implications regarding forecasting success). In addition to the lack of an absolute measure of performance, these... |

1 |
The Valuation of Risk Assets and the Selection of Risky Investments
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(Show Context)
Citation Context ...itz, 1965; Sharpe, 1966; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to the measure suggested by Treynor =-=(1965)-=-.sJensen 3 1967 (witness the widespread interest in the theory of random walks and its implications regarding forecasting success). In addition to the lack of an absolute measure of performance, these... |

1 | Trade and Securities Statistics: Security Price Index Record - Standard, Poor - 1964 |

1 |
General Equilibrium in a Stable Paretian Market
- Fama
- 1968
(Show Context)
Citation Context ... ( ) + j Â jX jb t˜ p + j Â jX jt˜ e j Â Note that the first term on the right hand side of (3) is just E( Mt˜ R ) , and since the market factor psis unique only up to a transformation of scale (cf. (=-=Fama, 1968-=-)) we can scale pssuch that jX jb = 1 j Âsand the second term becomes just p . Furthermore by assumption, the jt˜ esin the third term are independently distributed random variables with E( jt˜ e ) = 0... |

1 |
Mutual Fund Performance." Journal of Business 39, Part 2: pp 119-138
- Sharpe
- 1966
(Show Context)
Citation Context ...manager’s forecasting ability which is of interest in and of itself 2 See for example (Cohen and Pogue, 1967; Dietz, 1966; Farrar, 1962; Friend et al., 1962; Friend and Vickers, 1965; Horowitz, 1965; =-=Sharpe, 1966-=-; Treynor, 1965). 3 It is also interesting to note that the measure of performance suggested below is in many respects quite closely related to the measure suggested by Treynor (1965). Jensen 19673 (w... |