Abstract
A study of its ranking properties finds the Morningstar risk-adjusted ratings (RAR) for the decade ending 2001 and the excess return from a CAPM regression yield similar star ratings, but there are systematic differences between the RAR star ratings and the excess return estimated according to the Fama-French three-factor model. Over three-quarters of domestic equity funds with a ten-year five-star Morningstar rating do not keep their five stars under the null hypothesis of the Fama-French model. An explanation of this discrepancy provides support for the extensive modification of the Morningstar rating system made in July 2002.
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