Measuring Investment Performance in a Rational Expectations Equilibrium Model

Much research has been concerned with evaluating the performance of managed portfolios (e.g., mutual funds) and examining whether portfolio managers display, in some sense, performance. Superior performance would seemingly turn on the possession of superior information that is utilized in managing portfolios. In general, a fund's asset holdings (or portfolio weights) might not be observable to an outsider. Whether they are or not, however, they are likely to change over time. This happens especially when better performance is a result of superior information, since managers will change their portfolio composition on obtaining private information. Since such changes must be taken into account, the problem of measuring performance of managed portfolios is inherently different from that of evaluating the performance of individual assets, groups of assets, or, generally, portfolios with constant and known composition.