Mar 24, 2015
Can we evaluate an investment manager’s skill more quickly by using daily returns instead of monthly or annual returns?

Unfortunately, daily returns don’t provide more information. Evaluating a manager involves measuring an average return relative to noise in the average return as an estimate of the true expected return. In statistical terms, we are interested in the t-statistic for the average return—that is, the ratio of the average return to its standard error. For simplicity, suppose we assume monthly returns are the sum of randomly generated daily returns. The standard error of the daily average return is then one-twentieth the standard error of the monthly average return, so the daily average is estimated more precisely. But the daily mean is also one-twentieth the monthly mean. Thus, the t-statistic for the daily mean (the ratio of the mean to its standard error) is the same as the t-statistic for the monthly mean. 

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
This information is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Dimensional Fund Advisors and does not represent a recommendation of any particular security, strategy or investment product. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.