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3 Conditional performance evaluation.(Portfolio Performance Evaluation)

Traditional measures of risk-adjusted performance for mutual funds compare the average return of a fund with an OE benchmark designed to control for the fund's average risk. For example, Jensen's (1968) alpha is the difference between the return of a fund and a portfolio constructed from a market index and cash with fixed weights. The portfolio has the same average market exposure, or "beta" risk as the fund. The returns and beta risks are typically measured as averages over the evaluation period, and these averages are taken "unconditionally," or without regard to variations in the state of financial markets or the broader economy. One weakness of this unconditional approach ...

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