When Benchmark Indices have Alpha: Problems with Performance Evaluation

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Abstract
We first document significant nonzero alphas for common passive benchmark indices including the S&P500 and the Russell 2000 using the standard performance evaluation tools in academic literature, such as the four-factor model of Carhart (1997). We then proceed to analyze potential explanations for these apparent alphas. Finally, we revisit some existing mutual fund performance studies to show how important the evaluation methodology can be when drawing inferences, and we suggest improvements for the existing methodologies.

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