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THE VOLATILITY OF EQUITY MUTUAL FUND RETURNS

Zakri Bello

Central Connecticut State University, USA.

 

ABSTRACT

I investigated both the volatility and the level of diversification of domestic equity mutual funds from 1988 to 2008. I also investigated the Market Modelís explanatory power for domestic equity funds during that 20 year period. The volatility of equity mutual funds did not change significantly from April 1988 to March 1998, but it increased appreciably from April 1998 to March 2003, and then declined in the following five-year period from April 2003 to March 2008. This trend seems to differ from a previous study of common stock prices that found no trend in the stock market or industry volatility from 1962 to 1997. Moreover, the volatility of mutual fund portfolios varied with the aggressiveness of the investment objective, and the portion of total volatility that remained undiversified tended to be higher during periods of high market volatility. Consistent with the previous studies of common stocks, the explanatory power of the Market Model declined from April 1988 to March 2003. However, the explanatory power of the Market Model increased substantially from 2003 to 2008. Finally, stock mutual funds lead the expansionary phase of the business cycle, but do not appear to predict recessions three months ahead of time.

Key Words: Mutual Funds, Volatility, Idiosyncratic Risk, and Portfolio Diversification

JEL Codes: C13, C23, C25, and G23