RAROR
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Transcript of RAROR
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RAROR
Sharpe Ratio: ( William Sharpe)Return from Investment Risk free returnStandard deviation of the investment.
e.g.Scheme A: Return 18% Std. dev. 1.2
Scheme B: Return 30% Std. dev. 1.5
Assume risk free return to be 6%Sharpe ratio: Scheme A: ?
Scheme B: ?
Higher the betterperformer as it has higher risk premium
for every unit of standard deviation.Ideally useful for Individual investors with mixed portfolio
As it covers total risk and not just market risk.
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Treynor Ratio (Jack Treynor)
Return from investment risk freereturn
Beta of the investment.
Higher the ratio better the risk- rewardfor the investor.
Beta is empirically tested for equity,hence not suitable for debt schemes.
Ideal for large institutional investors
with diversified portfolio
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Jensen Alpha ( expected return based on beta)
Risk free return + Beta x Risk premium
Suppose the market has gone up from 4000 to4400( growth 10%) and beta of a scheme is 1.2
and risk free return is 6%Expected return:6% + 1.2 x ( 10% - 6%) =10.8% If actual return is 15% then Alpha is 4.2%
Ideal for diversified equity portfolio with nil non-
systematic risk.INDEX OF FUND MANAGERS
PERFORMANCE
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Eugene Fama:
Risk free return + Std. dev. x Risk
premium
Positive Eugene Fama ratio means
fund managers performance is
better than what is expected based
on scheme's total risk as
measured by standard deviation.
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TreynorBlack appraisal ratio:
Jenson Alpha divided by scheme'sunsystematic risk.
If unsystematic risk is 0.2
and Jenson Alpha is 4.2%
then Treynor-Black appraisal ratio
is 4.2% / 0.2 =21%Higher the ratio better is the fundmanagers performance
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M-square ( Franco and Lea)
(SD of market SD of scheme) x ( Returnon the scheme - Risk free return) + Riskfree return
If market has moved from 4000 to 4400and If scheme returns are 15% and riskfree return is 6% and SD of scheme andmarket is 1.5 and 1 respectively
M-square=( 11.5) x ( 15% - 6%) + 6%=12%
As this is better than market return of10%(growth)
The scheme has performed better .
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conclusion
Using the performance measures ismore an art than a science and henceincreases subjectivity.
If scheme is diversified-use Treynorand jenson Alpha ratios.
If scheme is non-diversified use
sharpe, eugen fama or M-squareratios.
Agencies to assist- CRISIL, ValueResearch, and AMC reports.
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RAROR- THE IN -THING!!
SORTINO RATIO:-S=(R-T)/DV
R = Asset or Portfolio return
T = Minimum Acceptable ReturnDV = Downside-Volatility
The ratio is more meaningful thanSharpe Ratio when there is marked
downside volatility.