A Contingent Claim Approach to Performance Evaluation
Coauthor(s): Ravi Jaganathan.
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We show that valuing performance is equivalent to valuing a particular contingent claim on an index portfolio. In general the form of the contingent claim is not known and must be estimated. We suggest approximating the contingent claim by a series of options. We illustrate the use of our method by evaluating the performance of 130 mutual funds during the period 1968-82. We find that the relative performance rank of a fund is rather insensitive to the choice of the index, even though the actual value of the services of the portfolio manager depends on the choice of the index.
Source: Journal of Empirical Finance
Glosten, Lawrence, and Ravi Jaganathan. "A Contingent Claim Approach to Performance Evaluation." Journal of Empirical Finance 1 (1994): 133-60.