Skilled Monkey or Unlucky Manager?

Document Type

Peer-Reviewed Article

Publication Date

10-2013

Abstract

When The Wall Street Journal used a monkey to choose stocks to invest in, it failed to launch a more comprehensive experiment based on the same principle. Using a probabilistic approach in a similar way to Roy’s safety-first risk measure, we consider the probability that a randomly managed portfolio will outperform a predefined benchmark and compare it with the probability that a professionally managed fund will outperform the same benchmark. Repeating this over a large number of random portfolios and managed funds while ensuring the comparison is a valid one, we effectively test whether investment management skill truly exists for long-only US equity portfolios or whether the efficiency of markets prohibits any longer-run outperformance. The results show that managed long-only equity portfolios do not show a higher probability of outperforming the index than randomly selected ones.

DOI

10.1057/jam.2013.22

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