There are thousands of mutual funds available, with no shortage of sources of information about them. Newspapers regularly report the value of each unit, mutual fund companies and brokers advertise extensively, and there are books on the subject. Many of the advertisements imply that individuals should invest in the advertiser’s mutual fund because it has performed well in the past. Unfortunately, there is little evidence to infer that past performance is a predictor of the future. However, it may be possible to acquire useful information by examining the managers of the mutual funds. Several researchers have studied the issue. One project gathered data concerning the performance of 2,029 funds.
The performance of each fund was measured by its risk adjusted excess return, which is the difference between the return on investment of the fund and a return that is considered a standard. The standard is based on a variety of variables, including the risk-free rate.
Four variables describe the fund managers: age, tenure (how many years the manager has been in charge), manager’s highest degree, and a measure of the quality of the manager’s education (the average Scholastic Achievement Test [SAT] score of students at the university where the manager received his or her undergraduate degree).
Conduct an analysis of the data. Determine the best model (if any) for predicting fund performance.