Skilled Monkey or Unlucky Manager?
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.
Vermorken, M., Gendebien, M., Vermorken, A., & Schröder, T. (2013). Skilled monkey or unlucky manager? Journal of Asset Management, 14(5), 267-277. doi:http://dx.doi.org/10.1057/jam.2013.22