Analysis of Incremental Returns of Canadian Mutual Funds

This paper presents some stochastic models of mutual fund returns to explain the risks associated with the net incremental return over a benchmark due to active investment management practices. This model can describe the stochastic behavior of the returns on established funds, but, more importantly, it also models the uncertainty or risk associated with new funds or funds with no track record. Using Canadian data, the paper also shows how to estimate the parameters of the model and check the model assumptions.