brown-bag lunch and finance seminar, NBER Behavioral Finance working group meeting, and Stanford Business School finance seminar. Errors and omissions remain our responsibility. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.

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We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which his investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures are estimated more precisely than standard measures, because they use historical returns and holdings of many funds to evaluate the performance of a single fund. According to one of our measures, funds with significantly positive ability considerably outnumber funds with significantly negative ability at the end of our sample. Simulations demonstrate that our measures are particularly useful in ranking managers. In an application that relies on such ranking, we find only weak persistence in the performance of U.S. equity funds after accounting for momentum in stock returns.

We decompose the cross-sectional variance of ¢rms' book-to-market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time-series results, transitory cross-sectional variation in expected 15-year stock returns causes only a relatively small fraction (20 to 25 percent) of the total cross-sectional variance. The remaining dispersion can be explained by expected 15 -year pro¢tability and persistence of valuation levels. Furthermore, this fraction appears stable across time and across types of stocks.We also show that the expected return on value-minus-growth strategies is atypically high at times when their spread in book-to-market ratios is wide.INTUITIVELY, BOTH EXPECTED STOCK RETURNS and expected cash-£ow growth play a role in determining the market price of a ¢rm's stock and, thus, its book-to-market ratio. Firms with high book-to-market ratios have on average higher subsequent stock returns than ¢rms with low book-to-market ratios (Rosenberg, Reid, and Lanstein (1985), Fama and French (1992), and others). Simultaneously, di¡erences in ¢rms' book-to-market ratios are also related to di¡erences in future expected cash-£ow and earnings growth as well as future pro¢tability. Low-book-to-market ¢rms grow faster and are persistently more pro¢table than high-book-to-market ¢rms.The relative importance of these two contributing factors to cross-sectional variation in ¢rms' book-to-market ratios remains an open empirical question.We decompose the cross-sectional variance of ¢rms' valuation multiples using a long (1938 to 1997) U.S. panel and a shorter (1982 to 1998) international panel. Our variance decompositions show what fraction of the cross-sectional dispersion in book-to-market ratios is caused by variation in expected stock returns