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Standard Fama-French and Carhart models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. The authors find that these alphas primarily arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is a downward-biased benchmark for U.S. stocks. They explore alternative ways to construct these factors and propose alternative models constructed from common and easily tradable benchmark indices. Such index-based models outperform the standard models both in terms of asset pricing tests and performance evaluation of mutual fund managers.
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