Next, we examine predictability in both benchmark returns and fund risk loadings. Consider the dogmatist who believes in such a predictability structure (PD-2). This investor would experience a nontrivial utility loss of basis points per month ( year) in December 2002 if forced to hold the optimal portfolio of the ND. The utility loss is even larger over the course of all 276 monthly investments. This loss averages (39) basis points per month over expansions (recessions). Moreover, the optimal portfolio of the PD-2 investor consists of very different mutual funds, relative to those optimally selected by investors who disallow predictability or who allow predictability only in.
