THE PERSISTENCE OF RISK-ADJUSTED MUTUAL FUND PERFORMANCE

We examine predictability for stock mutual funds using risk-adjusted r eturns, We find that past performance is predictive of future risk-adj usted performance. Applying modern portfolio theory techniques to past data improves selection and allows us to construct a portfolio of fun ds that significantly outperforms a rule based on past rank alone. In addition, we can form a combination of actively managed portfolios wit h the same risk as a portfolio of index funds but with higher mean ret urn. The portfolios selected have small but statistically significant positive risk-adjusted returns during a period where mutual funds in g eneral had negative risk-adjusted returns.