Data envelopment analysis models of investment funds

John D. Lamb, Kai-Hong Tee

Research output: Contribution to journalArticle

40 Citations (Scopus)

Abstract

This paper develops theory missing in the sizable literature that uses data envelopment analysis to construct return–risk ratios for investment funds. It explores the production possibility set of the investment funds to identify an appropriate form of returns to scale. It discusses what risk and return measures can justifiably be combined and how to deal with negative risks, and identifies suitable sets of measures. It identifies the problems of failing to deal with diversification and develops an iterative approximation procedure to deal with it. It identifies relationships between diversification, coherent measures of risk and stochastic dominance. It shows how the iterative procedure makes a practical difference using monthly returns of 30 hedge funds over the same time period. It discusses possible shortcomings of the procedure and offers directions for future research.
Original languageEnglish
Pages (from-to)687–696
Number of pages9
JournalEuropean Journal of Operational Research
Volume216
Issue number3
Early online date27 Aug 2011
DOIs
Publication statusPublished - 1 Feb 2012

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Keywords

  • Data envelopment analysis
  • Investment fund
  • Coherent risk measure
  • Diversification
  • Returns to scale
  • Stochastic dominance

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