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Investor sophistication : empirical analysis of capital allocation decisions of Norwegian mutual fund investors

Tykhonova, Diana; Akulenka, Stanislau
Master thesis
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URI
https://hdl.handle.net/11250/2678244
Date
2020
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  • Master Thesis [3258]
Abstract
Whether mutual fund investors act rationally when making capital allocation decision has for

long time been one of the key topics in the mutual fund literature. This paper is one of the first

attempts to assess investor sophistication in the Norwegian mutual fund market. Using a sample

of Norwegian mutual funds in the time period 1996-2018 we find that Norwegian investors do

not account for the common risk factors and in fact follow simple signals such as Morningstar

ratings when making their investment decisions. We show evidence that Morningstar ratings

account only for a very small percentage of funds’ volatility and, thus, investments in highrated funds are unlikely to be motivated by investors’ willingness to outsource risk adjustment

to Morningstar. Finally, we show that by investing into high-rated funds investors expose

themselves to the risk that they are not compensated for. Our findings suggest that Norwegian

mutual fund investors are unlikely to be sophisticated.

Keywords: Mutual funds, investor sophistication, Morningstar ratings, fund flows, Norway

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