The main purpose of this study is the development of a model for evaluating the performance of portfolios of risky assets. In evaluating the performance of portfolios the effects of differential risk must be taken into consideration. If investors are generally averse to risk, they will prefer more certain income streams to less certain streams. Under these conditions investors will accept additional risk only if they are compensated for it in the form of higher expected future returns. Thus, in a world dominated by risk averse investors, a risky portfolio must be expected to yield higher returns than a less risky portfolio, or it would be held.
Main Result: Funds don’t cover costs, on average. There is very little evidence that any individual fund has been able to earn significantly higher returns than those that could have been expected by random chance.