Study on the Relationship between Performance and Risk Taking of the Mutual Fund

Assuming there are only two representative portfolios in the market, we study on the relationship between performance and risk taking of the mutual fund. Based on the linear relative performance contract and constructing a dynamic model of portfolio selection, we get that the risk measured by the variance of absolute return of mutual fund does not increase all the time when the relative performance of mutual fund decline, but the tracking error increases. The higher the risk coefficient of manager, the more the asset is allocated on the benchmark portfolio. The constant term of linear fee structure do not affect the risk taking. We test the relationship between closed-end mutual performance and risk taking empirically with the data of weekly return from 2002 to 2005 of 54 close-end funds in China