We propose the outperformance probability as a new performance measure, which can beused in order to compare a strategy with a specified benchmark, and develop the basic statisticalproperties of its maximum-likelihood estimator in a Brownian-motion framework. The given resultsare used to investigate the question of whether mutual funds are able to beat the SP 500 or theRussell 1000. Most mutual funds that are taken into consideration are, in fact, able to beat the market.We argue that one should refer to differential returns when comparing a strategy with a givenbenchmark and not compare both the strategy and the benchmark with the money-market account.This explains why mutual funds often appear to underperform the market, but this conclusionis fallacious.
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