By Hendrik Bessembinder, Arizona State University, USA, hb@asu.edu | Michael J. Cooper, University of Utah, USA, mike.cooper@eccles.utah.edu | Feng Zhang, Southern Methodist University, USA, fengzhang@smu.edu
Alpha depends on the return measurement horizon, particularly as the horizon becomes long. We introduce a procedure to estimate long-horizon alphas from short-horizon returns. Among those sample mutual funds with positive alphas estimated from monthly returns, nearly half have negative alpha estimates when returns are measured at the 10-year horizon. Among sample funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over 70% have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon returns can be uninformative or misleading regarding fund performance for both active and passive investors over longer horizons.
Online Appendix | 104.00000163_app.pdf
This is the article’s accompanying appendix.