Do Size, Book-to-Market, and Beta Factors Explain Mutual Fund Returns?

Abstract

Out-of-sample tests of a three-factor capital asset pricing model using mutual fund data for the period 1995-2000 indicate that size, book-to-market (BV/MV), and market beta factors do explain mutual fund returns. Mutual funds that invested in large-capitalization stocks generated higher returns than those invested in small-cap companies. Also, low BV/ MV mutual fund portfolios registered higher returns than high BV/MV portfolios. The findings support the inclusion of beta as an important explanatory variable in stock returns, but raise serious questions about the effectiveness of the size and BV/MV factors.