Pragmatist Deng Xiaoping said, whether black or white, it catches mice is a good cat. Click here said that if the measure of a fund manager is excellent, just look at his / her income fund management performance on the line.
However, if the level of income as the sole criterion for judging the quality of a fund manager's job, does not seem appropriate.
For example, a 2% annual return of the portfolio, looks small, but if the whole market in the same period rose only 1%, compared to the entire pool of tradable securities to obtain a 2% return, too It can be said that the performance was very good. However, if this portfolio is particularly focused on investing in high-risk stock, it faces the risk of exposure is too large, but made only 1% higher than market returns, then this market higher returns, perhaps not boast.
In order to more accurately and appropriately measure the investment performance of a fund manager, people have invented a number of different methods used to determine a fund's risk-adjusted rate of return, most notably the Sharpe ratio.
Sharpe ratio (The Sharpe ratio) = (expected rate of return - risk-free rate) / portfolio standard deviation
The Sharpe ratio is often used to assess the overall performance of a portfolio, which is a comprehensive analysis of the benefits and risks, and to compare the performance between the portfolio. Its focus is a combination that no more than part of the risk-free rate of return standard deviation to use the portfolio to measure. Assuming that investors should be able to invest in government bonds and get risk-free return, the Sharpe ratio is the risk components to be analyzed over the risk-free return that part of the proceeds. In the framework of the theory of risk portfolio returns, the assumption is that bear higher risk means that should produce higher returns.
For example, if A fund manager acquired a 15% rate of return, while the B fund managers get a 12% rate of return, it is clear that A manager's performance look better. However, if A manager takes a greater risk than B manager, then the manager of the B risk-adjusted returns might be better.
As another example, assume a 5% risk-free rate, portfolio manager A standard deviation of 8%, while the standard deviation portfolio manager B was 5%. Sharpe ratio is 1.25 A, and B ratio is 1.4, the performance is clearly better than A. These calculations, B manager in the risk-adjusted basis can get a higher return on investment based.
This gives us a lesson, a portfolio of income is higher, the standard deviation is relatively low, when Sharpe ratio reaches or exceeds 1 is better, when more than two are very good, more than three can be described as very good.
In addition to the Sharpe ratio, and then talk about the other two also comes ratio is often used to evaluate the performance of fund managers, called a rising ratio (up ratio), called a decline in the ratio (down ratio). Talking about the rising rate when the market rises, the portfolio should also be rising, but greater than the market we go, that is a point when the market rises, a good combination of performance should be more than a point, that is greater than 1, it considered good. In contrast, the decline in the ratio talking about, when the market fell a point, a good combination of performance should be less than 1, considered good.
Source: stock valuation
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