Alpha and Performance Measurement: The Effect of Investor Heterogeneity
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Abstract
| Studies of investment performance routinely use various measures of alpha, yet the literature has not established that a positive (negative) alpha, as traditionally measured, means that an investor would want to buy (sell) a fund. However, under general conditions, when alpha is defined using the client's marginal utility function, a client faced with a positive alpha would want to buy the fund. Thus, performance measurement is inherently investor specific, and investors will disagree about the attractiveness of a given fund. We provide empirical evidence that bounds the effects of investor heterogeneity on performance measures, and study the cross sectional effects of disagreement on investors flow response to past fund performance. The effects of investor heterogeneity are economically and statistically significant. |
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| Elvira Sojli |
