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5. Fund Performance Measurement

5. Fund Performance Measurement. Based on Only Return Based on Risk & Return. Sharpe Ratio Treynor’s Ratio Jensen Alpha Appraised Ratio M 2 (M – Square) Information Ratio. NAV Return HPR Total Return with investment MWR [Money Weighted Return] TWR [Time Weighted Return].

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5. Fund Performance Measurement

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  1. www.Safeecollege.com

  2. 5. Fund Performance Measurement Based on Only Return Based on Risk & Return • Sharpe Ratio • Treynor’s Ratio • Jensen Alpha • Appraised Ratio • M2 (M – Square) • Information Ratio • NAV Return • HPR • Total Return with investment • MWR [Money Weighted Return] • TWR [Time Weighted Return] www.Safeecollege.com

  3. NAV Return : = NAV1 – NAV0 NAV0 Limitation: Does not count income distribution. Does not take into consideration Time Value. • HPR : = Income distributed + (NAV1 – NAV0 ) NAV0 Limitation: Does not count time value Assumes all income would come at period end Does not count impact of Reinvesment www.Safeecollege.com

  4. c) Total Return with Investment : (Closing Units × NAV1) – (Opening Units × NAV0) Opening Units × NAV0 Limitation: Does not count impact of time www.Safeecollege.com

  5. rp = average return of Mutual Fund σp = Standard Deviation of Mutual Fund returns d) Sharpe Ratio := rp – rf σp = Excess Return Risk over Risk free Return Total Risk of Mutual Fund It measures excess return over risk free return of a MF per unit of total risk taken in MF. Higher te Better This performance measurement tool does not require be benchmark hence it can be used for comparing any MF. Sharpe Ratio is based on CML Lines. This means we can compare Sharpe Ratio with CML Line Slope. If Sharpe Ratio is more than CML Slope than he has outperformed the benchmark or (proxy M) and vice a versa. www.Safeecollege.com

  6. e) Treynor Ratio : = rp – rf ßp Measures excess return of fund over risk free return for relative Systematic Risk. This Concept is based on SML, this means we can use Slope of SML and compare this Data with MF Treynor Ratio. If Treynor Ratio is more than slope of SML then is has outperformed the benchmark. Ranking based on Sharpe Ratio and Treynor ratio should be same for well diversified portfolio. For Comparing performance of various MF we need Treynor Ratio date where Beta are calculated based on same Benchmark. www.Safeecollege.com

  7. f) Jensen Alpha : (αp) Measures deviation of actual return of a fund from SML Return. αp = Actual Return - SML Return αp = rp – [rf + (rm – rf) ßp Positive : Outperformed Negative: Under Performed • Based on SML Line • This require benchmark for comparison of variou MF • This assumes that fund has negligible USR.To the extent the fund carries USR the jensen Alpha will not give correct picture. www.Safeecollege.com

  8. g) M2 [ M - Squared ] or Modigliani and Modigliami : It is an adjusted returnof a MF. MF return is adjusted to make it comparable with benchmark return. This means M2 calculates return of a fund on the assumption that fund has Total Risk similar to Total Risk of the Benchmark. Step 1: Calculate M2 (which is an adjusted return ) = rf + (rp – rf)× σm σp rp = Mutual Fund Return σp = Mutual Fund Total Risk σm = Proxy Market Portfolio risk or Benchmark www.Safeecollege.com

  9. Step 2: Now compare M2 with benchmark return to decide whether the fund has outperformed the benchmark. • This performance tool is based on CML • This tool is also based on Total Risk of fund. • Ranking based on sharpe ratio and M2 will always be same. Concept Point: M2 is dependent upon Sharpe ratio hence both would give a similar ranking. www.Safeecollege.com

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