Risk analysis Ratios-what they portray?


Investor tends to focus mainly on the returns while evaluating the performance of the mutual fund. On the contrary they pay very little attention to the investment risk involved in generating those returns. These risk affect the real return on investment.

ALPHA
Alpha is used to determine the abnormal return of fund over & above the theoretical expected returns.
It takes the volatility (price risk) of a fund and compares its risk-adjusted performance to the benchmark index.
The excess return of the investment relative to the return of the benchmark index is the "alpha".
Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. For investor teh more positive an alpha is the better it is.
ALPHA= Portfolio return- [ risk free rate+ portfolio beta* (market return-risk free rate)]


BETA
Also known as the " beta coefficient", it is a measure of the volatility, or systematic risk, f a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and describes the relation of returns between the scheme & its benchmark.
By definition, the benchmark has a beta of 1.0 and individual schemes beta is measured according to the deviation of its returns from the market.
A beta of 1.0 indicates that the fund NAV will move in same direction as that of benchmark index.
A beta of less than 1.0 will indicates it will more volatile than benchmark index.


Treynor ratio
It is another useful measure of performer when comparing mutual funds within a category. The trenyor ratio is a fund;s excess returned divided by its beta, where excess return is the actual return less the risk free return, while Sharpe ration measures excess return per unit of total risk.


Standard deviation
Standard deviation (SD) is the most widely used measurement of variability in returns in financial instruments. It measures the Total risk, it is also used to evaluate mutual funds and shows the degree to which the fund fluctuates in relation to its average return over a period of time.

These are the basic Knowledge which an Investor needs to invest his money in a proper way so that he can make good money from Mutual funds or any other investment avenues, which help them to appreciate there capital.


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