EFFICIENCY OF MUTUAL FUNDS AND PORTFOLIO PERFORMANCE-MEASUREMENT - A NONPARAMETRIC APPROACH

In finance, portfolio performance assessment is an important area of r esearch. The two popular indices of performance are the Jensen's alpha and the Sharpe index. However there an a number of shortcomings of th e above measures that have been highlighted in the literature. We prop ose a new measure of performance that seeks to address the limitations of the earlier indices. The new index is calculated by employing a we ll known method in operations research called data envelopment analysi s. We show the benefits of the proposed approach and assess the perfor mance of mutual funds. We compare the results with traditional indices of performance. An interesting result we obtain is that the mutual fu nds are all approximately mean-variance efficient. (C) 1997 Elsevier S cience B.V.