Prior beliefs about pricing models can be useful to someone investing in mutual funds. A pricing model implies that a combination of the model's benchmark assets provides the highest Sharpe ratio within a passive universe. That implication is useful to an investor seeking a high Sharpe ratio, even if the investor has less than complete con¯dence in the model's pricing accuracy and cannot invest directly in the benchmarks. Prior beliefs about managerial skill are also important in the investment decision. One investor might believe completely in a model's accuracy in pricing passive assets but believe active managers may well possess stock-picking skill. Another investor might be skeptical.
