The quantification of speculative risk appears to be useful for measuring risk in diversified portfolio, such as mutual funds. Based on the measure of systematic skewness, I explore the alleged shift among mutual funds toward more highly aggressive investment policies and the apparent increase in the diversity of investment policies from fund to fund. My sample covers 485 randomly selected mutual funds listed on Datastream for the period from April, 1997 to July, 2002. The risk taking behavior by mutual fund managers are investigated by linking to different market conditions and managerial incentives based on fund flow-performance relationship. Fund managers with enhanced performance tend to decrease the speculative risk of fund portfolios while fund managers with deteriorative performance tend to increase the speculative risk of fund portfolios. However, implementing speculative investment strategies and hence increasing portfolio speculative risk may not come without cost. The evidence of this article has some important implications with respect to behavioral finance.
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