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    Chapter 11 NISM

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    Kiran Vidhani
    This document discusses various performance metrics used to evaluate mutual funds: 1) Beta measures a fund's volatility relative to the overall market. It indicates whether the fund is more or less volatile than the market. 2) Alpha measures a fund's performance independent of market movements. A positive alpha means the fund outperformed its benchmark. 3) Standard deviation is a measure of risk, with higher values indicating greater volatility in returns. Sharpe and Treynor ratios use standard deviation to measure risk-adjusted performance.

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    Chapter 11 NISM

    Uploaded by

    Kiran Vidhani
    45 views12 pages
    This document discusses various performance metrics used to evaluate mutual funds: 1) Beta measures a fund's volatility relative to the overall market. It indicates whether the fund is more or less volatile than the market. 2) Alpha measures a fund's performance independent of market movements. A positive alpha means the fund outperformed its benchmark. 3) Standard deviation is a measure of risk, with higher values indicating greater volatility in returns. Sharpe and Treynor ratios use standard deviation to measure risk-adjusted performance.

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    This document discusses various performance metrics used to evaluate mutual funds: 1) Beta measures a fund's volatility relative to the overall market. It indicates whether the fund is more or less volatile than the market. 2) Alpha measures a fund's performance independent of market movements. A positive alpha means the fund outperformed its benchmark. 3) Standard deviation is a measure of risk, with higher values indicating greater volatility in returns. Sharpe and Treynor ratios use standard deviation to measure risk-adjusted performance.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    45 views12 pages

    Chapter 11 NISM

    Uploaded by

    Kiran Vidhani
    This document discusses various performance metrics used to evaluate mutual funds: 1) Beta measures a fund's volatility relative to the overall market. It indicates whether the fund is more or less volatile than the market. 2) Alpha measures a fund's performance independent of market movements. A positive alpha means the fund outperformed its benchmark. 3) Standard deviation is a measure of risk, with higher values indicating greater volatility in returns. Sharpe and Treynor ratios use standard deviation to measure risk-adjusted performance.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    MF Scheme Performanc

    • Beta Value
    • Alpha
    • Standard Deviation
    • Sharpe Ratio
    • Treynor Ratio

    Dr. Ankit Jain 1


    Beta Value

    Beta : Beta measure the sensitivity of mutual fund scheme


    towards the market movement.
    • Beta is always benchmarked to 1.It means market Beta is
    1.
    • If the beta is 0.70 the fund is less volatile and movement
    in stock price is less.
    • If Beta of Mutual fund 1.2
    • Beta is always benchmarked to 1
    • It means fund is 20% more volatile to market.
    • If 10 % market grows then fund grow by 12% and vice
    versa.
    Dr. Ankit Jain 2
    Alpha

    • In mutual fund the measure of alpha denotes the


    performance of the fund manager.
    • Positive alpha means fund perform better than
    benchmark or market.
    • Negative alpha means fund perform worse than the
    benchmark or market.

    Dr. Ankit Jain 3


    Computation of Alpha

    Alpha= (Rp – Rf) – beta (Rm-Rf)

    • Rp represents the portfolio return

    • Rf represents the risk-free rate of return

    • Beta represents the systemic risk of a portfolio.

    • Rm represents the market return


    Dr. Ankit Jain 4
    • For example, assuming that the actual return of the
    fund is 30%, the risk-free rate is 8%, beta is 1.1, and
    the benchmark index return is 20%, alpha is
    calculated as:
    • Alpha = (0.30-0.08) – 1.1 (0.20-0.08)

    • = 0. 088 or 8.8%
    • The result shows that the investment in this example
    outperformed the benchmark index by 8.8%.

    Dr. Ankit Jain 5


    Standard Deviation
    • Risk is deviation from expected return.
    • Standard deviation is a measure of total risk.
    • A higher standard deviation means greater volatility
    in return and greater risk.
    • Standard deviation is the square root of variance.
    • More the S.D higher the risk.
    • Lower the S.D less risk.
    • Formula for calculating S.D in M.s excel.
    • =stdev(range contain the return time series)

    Dr. Ankit Jain 6


    Utility of Sharpe ratio

    • Sharp ratio is use to compare mutual fund.


    • Sharp ratio is also show the performance of
    portfolio.
    • High Sharpe ratio suggest that high return by taking
    less risk and vice versa.

    Dr. Ankit Jain 7


    Sharpe Ratio
    • Sharpe ratio is the measure of risk-adjusted return of a financial
    portfolio.
    • It is used to calculate scheme return earned in excess of risk
    free rate considering the standard deviation as measure of
    volatility.
    • A portfolio with a higher Sharpe ratio is considered superior
    relative to its peers.
    • The measure was named after William F Sharpe.
    • Sharpe ratio is a ratio of return versus risk.
    • Sharp ratio = Rp- Rf/ Standard deviation.
    • Rp= Expected return/Scheme return
    • Rf= Risk free return
    Dr. Ankit Jain 8
    Suppose, there are two mutual funds to compare with different
    portfolio having different risk level.
    • Investment of Mid Cap Fund and details are as follows:-
    Portfolio return = 35%
    Risk free rate = 15%
    Standard Deviation = 15
    • Investment of Bluechip Fund and details are as follows:-
    Portfolio return = 30%
    Risk free rate = 10%
    Standard Deviation = 5
    Calculate and compare sharpe ratio and suggest which scheme is
    good.
    Dr. Ankit Jain 9
    • Bluechip Fund = 4
    • Mid Cap fund = 1.33

    Bluechip mutual fund performed better than Mid cap mutual


    fund relative to the risk involved in the investment.

    Dr. Ankit Jain 10


    Treynor Ratio
    • Treynor ratio shows the risk adjusted performance of the fund.
    Here the denominator is the beta of the portfolio. Thus, it takes
    into account the systematic risk of the portfolio.
    • Jack Treynor extended the work of William Sharpe by
    formulating treynor ratio. Treynor ratio is similar to Sharpe ratio,
    but the only difference between the ratios is that of the
    denominator.

    Treynor ratio = Rp- Rf/ Beta.


    • Rp= Expected return
    • Rf= Risk free return

    Dr. Ankit Jain 11


    Suppose the average return generated by your fund is 10% and
    the risk-free rate is 6%. If the fund’s historic beta is 2.
    Compute Treynor Ratio.
    It implies that the fund gave two units of return for every
    additional unit of market risk assumed.
    While comparing two funds, you may use Treynor Ratio to
    arrive at the ideal fund. It is assumed that the fund with a
    higher Treynor ratio is better at compensating you for risk-
    taking as compared to the other fund which has a lower
    Treynor ratio.

    Dr. Ankit Jain 12

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