Int. J. Society Systems Science, Vol. 3, Nos. 1/2, 2011 119 Copyright © 2011 Inderscience Enterprises Ltd. Mutual funds return and risk decomposition evaluation based on quadratic-constrained DEA models Xiujuan Zhao School of Economics and Management, Beijing University of Posts and Telecommunication, Beijing 100876, China E-mail: xjzhao@iss.ac.cn Kin Keung Lai* Department of Management Sciences, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong E-mail: mskklai@cityu.edu.hk *Corresponding author Shouyang Wang Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing 100080, China E-mail: sywang@amss.ac.cn Abstract: This paper proposes two quadratic-constrained DEA models for the evaluation of mutual funds, from a perspective of evaluation based on endogenous benchmarks. In comparison to the previous studies, this paper decomposes the two vital factors for mutual funds performance, i.e., risk and return, in these quadratic-constrained DEA models, one of which is a partly controllable quadratic-constrained programming, in order to construct mutual funds’ endogenous benchmarks and give insight management suggestions. The approach is illustrated on a sample of 64 actual mutual funds in the China market. It identifies the root reasons of inefficiency and the ways for improving performance. The most important conclusion is that the ranking of mutual funds in China depends mostly on the system risk control. Keywords: mutual funds; data envelopment analysis; DEA; performance evaluation; efficiency; persistence. Reference to this paper should be made as follows: Zhao, X., Lai, K.K and Wang, S. (2011) ‘Mutual funds return and risk decomposition evaluation based on quadratic-constrained DEA models’, Int. J. Society Systems Science, Vol. 3, Nos. 1/2, pp.119–136. Biographical notes: Xiujuan Zhao is an Associate Professor at the School of Economics and Management, Beijing University of Posts and Telecommunications. She has worked in City University of Hong Kong, the