Portfolio Risk Management Implications of Mutual Fund Investment Objective Classifications

Abstract

I examine portfolio risk management implications of using hypothetical investment returns from a sample of mutual funds in a variety of investment objective classifications to select mutual funds. While early research supported this practice by showing that risk is homogeneous within investment objective groups and heterogeneous between groups, more recent research suggests that earlier findings are no longer true. Research also suggests that load and no-load funds may exhibit risk differences. I examine whether risk is homogeneous within investment classification and heterogeneous between classes after controlling for potential load effects. Results reveal that significant risk differences exist even after controlling for the load structure of the fund and that those risk differences can have significant implications for portfolio risk management.