A Study Of Evaluations Of Mutual Fund Investment Strategies

Evaluations of publicly announced investment strategies of open-end mutual funds were secured from a questionnaire sent to brokers and editors of financial newsletters. Ex Ante evaluations secured in this manner are compared with ex post performance over the period 1984-1988 and rated via data from Morningstar, Inc., and Business Week on mutual fund Performances over this same period. The present study is designed so that separations can be effected between risk and return evaluations and Performance over all pertinent ex ante and ex post pairings. Ex ante evaluations of risk and return are found to be positively correlated—as posited in the finance, decision theory and economics literatures—but their ex post pairings are negatively related. Somewhat surprisingly, ex ante to ex post evaluations of risk are positively correlated while ex ante to ex post evaluations of return are negatively correlated. The source of the ex ante to ex post negative relations is therefore in the return rather than the risk evaluations. This casts additional light on the Bowman Paradox (and related topics) which have been extensively studied in the Strategic management literature. It also adds to these paradoxes and suggests programs for further research in a manner that is discussed in the addendum to this paper.