Edwin J. Elton, Martin J. Gruber; Reflections on the Origins of the European Finance Association, European Finance Review, Volume 3, Issue 1, 1 January 199

[Mutual fund attrition can create problems for a researcher because funds that disappear tend to do so due to poor performance. In this article we estimate the size of the bias by tracking all funds that existed at the end of 1976. When a fund merges we calculate the return, taking into account the merger terms. This allows a precise estimate of survivorship bias. In addition, we examine characteristics of both mutual funds that merge and their partner funds. Estimates of survivorship bias over different horizons and using different models to evaluate performance are provided.]

This is the first study to examine both how well plan administrators select funds for 401(k) plans and how participants react to plan administrator decisions. We find that, on average, administrators select funds that outperform randomly selected funds of the same type although they do not outperform index funds of the same type. When administrators change offerings, they choose funds that did well in the past, but, after the change, added funds do no better than dropped funds. Plan participants in aggregate change their allocation decisions in a way that accentuates the changes in allocation caused by returns. The change in allocation due to the investment of new money and interfund transfers is about the same size, and in the same direction, as the change due to returns. Participant allocations in aggregate do no better than naïve allocation rules, such as equal investment in each offering.

This paper explores investors portfolio behavior when security returns can be described by one of the forms of the CAPM model and investors pay taxes. The conditions under which an investor holds the market portfolio are explored. In addition the extent to which securities are held in proportions which differ from market weights are shown to be functions of tax rates, dividend policies, and the variance covariance structure between all securities.

Many financial institutions employ outside portfolio managers to manage part or all of their investable assets. It is well recognized that outside portfolio managers are unwilling to share security information with each other or with the centralized decision maker and this in general will lead to sub-optimal portfolios. In this paper, we derive an implementable set of rules under which a central decision maker can make optimal decisions without requiring decentralized decision makers to reveal estimates of security returns. Furthermore, we derive conditions under which these rules hold and when they do not hold.

examining the reasonableness and accuracy of investment advice. Topics such as earnings estimates, security analysts recommendations, and recommendations for selecting mutual funds have been studied extensively. However, almost no attention has been paid to examining advice about the asset allocation decision (the allocation of funds across broad classes of assets). This is surprising because the asset allocation decision has been recognized as a major determinant of return and risk and because of this, advice on the optional allocation decision is provided by most brokerage firms and investment advisors Given the importance of the asset allocation decision we anticipate that the rationality of asset allocation advice will be extensively examined. The purpose of the article is two fold. First, we will examine modern portfolio theory to see what we can learn about the general characteristics of advice that are necessary for consistency with theory. Second, we will examine the advice of some specific investment advisors to see if their advice is consistent with rational behavior. We proceed in three steps. We first review some of the basic tenets of MPT, discuss alternative formulations of the problem, and examine which formulation is appropriate and

One of the major problems in finance is that of combining the separate costs of debt and equity into an appropriate cutoff rate for new investment; this problem is particularly acute when the firm is changing its capital structure. Solutions to this problem which have been proposed include various types of both marginal costing and average costing.

In testing hypotheses, researchers are almost always faced with the problem of isolating the effect of certain variables. This is a particularly acute problem in the social sciences, where the absence of an experimental environment means that researchers must resort to statistical methods of adjustment.

As a result of poor asset allocation decisions by 401(k) participants, 72% of all plans now offer target date funds, and participants heavily invest in them. Here, we study the characteristics and performance of TDFs, providing a unique view by employing data on TDFs holdings. We show that additional expenses charged by TDFs are largely offset by the low-cost share classes they hold, not normally open to their investors. Additionally, TDFs are very active in their allocation decisions and increasingly bet on nonstandard asset classes. However, TDFs do not earn alpha from timing or their selection of individual assets. (JEL G11. G23.)

[We investigate the informational efficiency of mutual fund performance for the period 1965-84. Results are shown to be sensitive to the measurement of performance chosen. We find that returns on S&P stocks, returns on non-S&P stocks, and returns on bonds are significant factors in performance assessment. Once we correct for the impact of non-S&P assets on mutual fund returns, we find that mutual funds do not earn returns that justify their information acquisition costs. This is consistent with results for prior periods.]