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Step 3: Stock Pickers

to determine if a series of historical returns is reliably superior – showing a t-statistic of 2 or higher – to a risk-equivalent benchmark. This can determine whether alpha (returns relative to its benchmark return) is due to luck or skill. In Figure 3-2, the t-test is applied to U.S. equity funds in six different style classifications over a 20-year period. Out of 438 mutual funds constructed with at least 90% U.S. equities, 98.4% of those fund managers did not have a statistically significant alpha, meaning any alpha they did have was due to luck, not skill. See the Step 5 Solutions section for a further explanation of the t-statistic. Figure 3-2

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...