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An R-Based Landscape Validation of a Competing Risk Model
Published on: September 16, 2022
Risk-adjusted impact of administrative costs on the distribution of terminal wealth for long-term investment
Montserrat Guillén1, Søren Fiig Jarner2, Jens Perch Nielsen3
1Department of Econometrics, Riskcenter-IREA, University of Barcelona, Diagonal 690, 08034 Barcelona, Spain.
Abstract:
The impact of administrative costs on the distribution of terminal wealth is approximated using a simple formula applicable to many investment situations. We show that the reduction in median returns attributable to administrative fees is usually at least twice the amount of the administrative costs charged for most investment funds, when considering a risk-adjustment correction over a reasonably long-term time horizon. The example we present covers a number of standard cases and can be applied to passive investments, mutual funds, and hedge funds. Our results show investors the potential losses they face in performance due to administrative costs.
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