MF Scheme Performanc

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

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 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.
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 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.

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 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

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• 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%.

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 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)

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 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.

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 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
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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.
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• 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.

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 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

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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.

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