Investments, tenth edition

 Figure 9.5 

Estimates of individual mutual fund alphas, 1972–1991. This is a plot of the frequency distri-

bution of estimated alphas for all-equity mutual funds with 10-year continuous records. 

  Source: Burton G. Malkiel, “Returns from Investing in Equity Mutual Funds 1971–1991,”  Journal of Finance  50 (June 1995), pp. 549–72. 

Used with permission of John Wiley and Sons, via Copyright Clearance Center. 

Alpha (%)

Frequency

36

32

28

24

16

20

12

8

4

0

−3

−2

−1

0

1

2

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P A R T   I I I

  Equilibrium in Capital Markets

 This result is quite meaningful. While we might expect realized alpha values of indi-

vidual securities to center around zero, professionally managed mutual funds might be 

expected to demonstrate average positive alphas. Funds with superior performance (and 

we do expect this set to be nonempty) should tilt the sample average to a positive value. 

The small impact of superior funds on this distribution suggests the difficulty in beating 

the passive strategy that the CAPM deems to be optimal. 

 From the standpoint of the industry, an index portfolio that can be beaten by only a 

small fraction of professional managers over a 10-year period may well be taken as ex-ante 

efficient for all practical purposes, that is, to be used as: (1) a diversification vehicle to mix 

with an active portfolio from security analysis (discussed in Chapter 8); (2) a benchmark 

for performance evaluation and compensation (discussed in Chapter 24); (3) a means to 

adjudicate law suits about fair compensation to various risky enterprises; and (4) a means 

to determine proper prices in regulated industries, allowing shareholders to earn a fair rate 

of return on their investments, but no more.