Evaluating Portfolio Performance with Stochastic Discount Factors

We first discuss performance evaluation using stochastic discount factors and relate it to traditional mean-variance analysis. We then use Monte Carlo experiments to examine the properties of various general method of moment (GMM) estimators. The test statistics are fairly well behaved although serious size distortions are found in some cases. The simulations also show that significant excess return, or a long sample, is needed to reject neutral performance. Finally, we offer an evaluation of Swedish-based mutual funds. The conditional evaluation indicates that funds have had nonneutral performance as revealed by the predictability of the unconditional performance measure.

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