This article examines the risk and return characteristics of U.S. mutual funds. We employ an equilibrium version of the Arbitrage Pricing Theory (APT) and a principal-components-based statistical technique to identify performance benchmarks. We also consider the Capital Asset Pricing Model...

This article develops an intertemporal, discrete-time, competitive equilibrium version of the arbitrage pricing theory (APT) and explores the econometric implications of this model under various restrictions on investor preferences and on the dynamic behavior of dividends. We describe conditions...

This paper develops a theory and econometric method of portfolio performance measurement using a competitive equilibrium version of the Arbitrage Pricing Theory. We show that the Jensen coefficient and the appraisal ratio of Treynor and Black are theoretically compatible with the Arbitrage...

The Arbitrage Pricing Theory (APT) of Ross (1976, 1977), and extensions of that theory, constitute an important branch of asset pricing theory and one of the primary alternatives to the Capital Asset Pricing Model (CAPM). In this chapter we survey the theoretical underpinnings, econometric...

Investors are natural risk bearers, in part due to the vast array of risk management tools available to them. These tools allow a risk budgeting process that de-couples the asset allocation and active bets taken in the portfolio. The risk of non-traded assets in the portfolio can be reduced by...

This paper considers two methods of estimating factor mimicking portfolios from asset returns: Two-pass cross-sectional regression and asymptotic principal components. We show that, for a balanced panel of assets, iterating the two-pass cross-sectional regression converges to the same estimated...

We suggest a technique for estimating pervasive economic factors which allows the use of all available security return data. The resulting factor estimates can be used in applications and tests of the Arbitrage Pricing Theory (APT). An obvious advantage of the technique is that more precise...

This paper develops a dynamic approximate factor model in which returns are time-series heteroskedastic. The heteroskedasticity has three components: a factor-related component, a common asset-specific component, and a purely asset-specific component. We develop a new multivariate GARCH model...

An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test...