Title: Mutual fund performance benchmarking using a quadratic directional distance function approach
Authors: Konstantina Pendaraki
Addresses: Department of Business Administration of Food and Agricultural Enterprises, University of Patras, 30 100 Agrinio, Greece
Abstract: The purpose of this paper is to apply a quadratic directional distance function in order to validate a relative performance indicator for portfolio benchmarking analysis. Based on a daily data set generated from a sample of 43 equity mutual funds the present study compares the performance results given by a directional and two standard distance function models as well as with a traditional fund performance index for periods ranging from 6 months to 4 years. A significant difference was observed in their rankings overall time horizons. This finding implies that ignoring the diversification effect of co-variances in portfolio risk reduction and the potential improvements in returns will yield a biased estimate of mutual fund performance.
Keywords: financial management; directional distance function; data envelopment analysis; DEA; portfolio selection; performance evaluation; mutual funds; fund performance; benchmarking; diversification; co-variance; portfolio risk reduction.
International Journal of Financial Engineering and Risk Management, 2015 Vol.2 No.1, pp.30 - 47
Received: 07 Mar 2014
Accepted: 18 Oct 2014
Published online: 13 Apr 2015 *