15. Performance

8/10/2019 15. Performance

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Performance Evaluation of Mutual Fund/ Portfolio


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Standard Deviation

Reports a fund's volatility, which indicates thetendency of the returns to rise or fall drastically in

a short period of time.

Measuring the degree to which the fund

fluctuates in relation to its mean return of a fundover a period of time.

A stable past performance of a fund is not

necessarily a guarantee of future stability.

Compare the fund to another with a similarinvestment strategy and similar returns


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Determines the volatility, or risk, of a fund in

comparison to that of its index or benchmark

A fund with a beta very close to 1 means the

fund's performance closely matches the index or

benchmark

If, for example,

A fund has a beta of 1.03 in relation to the BSE

Sensex, the fund has been moving 3% more thanthe index. Therefore, if the BSE Sensex increased

10%, the fund would be expected to increase

10.30%.

Beta


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R-Squared

R-squared describes the level of associationbetween the fund's volatility and market risk

R-squared values range between 0 and 1

If a fund's beta has an R-squared value that isclose to 1, the beta of the fund should be trusted

R-squared value that is less than 0.5 indicates

that the beta is not particularly useful


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AlphaAlpha = (Fund return-Risk free return) - Funds beta

*(Benchmark return- risk free return)Alpha is the risk-adjusted return on an investment

Alpha is the difference between the returns one wouldexpect from a fund, given its beta, and the return it

actually produces

A positive alpha of 1.0 means the fund hasoutperformed its benchmark index by 1%.

A negative alpha would indicate an underperformanceof 1%.


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AlphaA measure of performance on a risk-adjusted basis. Alphatakes the volatility (price risk) of a mutual fund andcompares its risk-adjusted performance to a benchmarkindex.

The excess return of the fund relative to the return of thebenchmark index is a fund's alpha.

The abnormal rate of return on a security or portfolio in excessof what would be predicted by an equilibrium model like

the capital asset pricing model (CAPM).

If a CAPM analysis estimates that a portfolio should earn 10%based on the risk of the portfolio but the portfolio actuallyearns 15%, the portfolio's alpha would be 5%. This 5% isthe excess return over what was predicted in the CAPM

model.


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The Treynor Measure

This Index is a ratio of return generated by

the fund over and above risk free rate ofreturn during a given period and systematic

risk associated with it (beta).

Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,

Ri represents return on fund or portfolioRf is risk free rate of return

Bi

is beta of the fund.


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Jenson Model This measure involves evaluation of the

returns that the fund has generated vs. thereturns actually expected out of the fundgiven the level of its systematic risk.

Required return of a fund at a given level ofrisk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)

Where, Rm = average market return during the

given period.Ri= average rate of return on portfolio p or the

fund


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Fama Model

Compares the performance, measured in termsof returns, of a fund with the required return

commensurate with the total risk associated with

it.

Required return can be calculated as:

Ri = Rf + Si/Sm*(Rm - Rf)

Where, Sm = standard deviation of market returnsSi = standard deviation of the portfolio or fund


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The sources of tracking are transaction costs, feescharged by the AMC, fund expenses and cash

holdings. One of the reasons for tracking error in

passively managed funds is the sampling bias.

In order to reduce trading and transaction costs,

fund managers hold a selection of securities that is

statistically likely to replicate the performance of

the index. The sample does not exactly perform asthe index, which leads to differential returns or

tracking error.


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Thank You

Documents

15. Performance