Mutual funds return and risk decomposition evaluation based on quadratic-constrained DEA models

Abstract

This paper proposes two quadratic-constrained DEA models for the evaluation of mutual funds, from a perspective of evaluation based on endogenous benchmarks. In comparison to the previous studies, this paper decomposes the two vital factors for mutual funds performance, i.e., risk and return, in these quadratic-constrained DEA models, one of which is a partly controllable quadratic-constrained programming, in order to construct mutual funds’ endogenous benchmarks and give insight management suggestions. The approach is illustrated on a sample of 64 actual mutual funds in the China market. It identifies the root reasons of inefficiency and the ways for improving performance. The most important conclusion is that the ranking of mutual funds in China depends mostly on the system risk control.