Return Dispersion and Active Management

Posted: 5 Nov 2001

See all articles by Harindra de Silva

Harindra de Silva

Analytic Investors, Inc.

Steven G. Sapra

Analytic Investors, Inc.; Claremont Graduate University

Steven Thorley

BYU Marriott School of Business


The cross-sectional variation of U.S. stock returns has been unusually high in the past few years. The wide dispersion in security returns has led to correspondingly wide dispersion in fund returns. For example, the cross-sectional standard deviation of returns on actively managed domestic equity mutual funds was 24 percent in 1999, compared with only 5 percent in 1996. We argue that the wide dispersion in fund performance is a natural result of increased security return dispersion and has little to do with changes in the informational efficiency of the market or the range of managerial talent. The dramatic increase in return dispersion warrants a reexamination of traditional methodologies for measuring fund performance that implicitly assume constant dispersion. We show how performance benchmarking can be extended to incorporate the information embedded in return dispersion, as well as the benchmark mean return, by correcting fund alphas with a period- and asset-class-specific measure of security return dispersion.

Suggested Citation

de Silva, Harindra and Sapra, Steven and Thorley, Steven, Return Dispersion and Active Management. Available at SSRN:

Harindra De Silva

Analytic Investors, Inc. ( email )

555 West 5th Street
50th Floor
Los Angeles, CA 90013
United States
213-688-3015 (Phone)
213-688-8856 (Fax)

Steven Sapra

Analytic Investors, Inc. ( email )

555 W. 5th St.
50th Floor
Los Angeles, CA 90013
United States
213-688-3015 (Phone)
213-688-8856 (Fax)


Claremont Graduate University ( email )

150 E. Tenth Street
Claremont, CA 91711
United States

Steven Thorley (Contact Author)

BYU Marriott School of Business ( email )

616 TNRB
Brigham Young University
Provo, UT 84602
United States
801-378-6065 (Phone)
801-378-5984 (Fax)

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