This article examines the risk and return characteristics of U.S. mutual funds. We employ an equilibrium
version of the Arbitrage Pricing Theory (APT) and a principal-components-based statistical technique to identify
performance benchmarks. We also consider the Capital Asset Pricing Model (CAPM) as an alternative. We implement a procedure for overcoming the rotational indeterminacy of factor models. This procedure is a hybrid of
statistical factor estimation and prespecification of factors. We estimate measures of timing ability for the CAPM
and extend it to the APT. We find that this timing test is misspecified due to noninformation-based changes in
mutual fund betas. We develop a modification of the timing measure that, under certain conditions, distinguishes
true timing ability from noninformation-based beta changes
