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1 A Bayesian Approach to Estimating Mutual Fund Returns Amir F. Atiya 1 Malik MagdonIsmail

Summary: 1 A Bayesian Approach to Estimating Mutual Fund Returns
Amir F. Atiya 1 Malik Magdon­Ismail
Learning Systems Group Learning Systems Group
EE Department EE Department
Caltech, MC 136­93 Caltech, MC 136­93
Pasadena, CA 91125 Pasadena, CA 91125
amir@work.caltech.edu malik@work.caltech.edu
Accurate estimation of mutual fund statistics, such as mean return and standard de­
viation, can help shedding some light onto whether some mutual funds can consistently
outperform the general market. In addition, it can help investors make more sound in­
vestment decisions. Because the available sample of returns is often not enough to give
sufficient confidence in the estimates, we propose a novel Bayesian estimation approach,
whereby the priors are obtained from the general market returns (by general market we
mean the collection of thousands of available mutual funds). The justification for this is
that any mutual fund is a subset of the general market, and it will therefore inherit some
of its statistical properties. The advantages we gain is that we make use of the extensive
sample size of the general market returns to fine tune our fund return estimates. The
problem we face, however, is that the a priori density of the mean and standard deviation
of the general market returns are unknown. The reason is that for an individual fund, the
mean and standard deviation of the return can not be obtained exactly, as we can only


Source: Abu-Mostafa, Yaser S. - Department of Mechanical Engineering & Computer Science Department, California Institute of Technology
Magdon-Ismail, Malik - Department of Computer Science, Rensselaer Polytechnic Institute


Collections: Computer Technologies and Information Sciences