PERFORMANCE MEASURES:

Performance of the various mutual fund schemes was compared on the basis of following
parameters:

• Jensen Measures
• Sharpe ratio
• Treynor Ratio
• Sortino Ratio

Jensen Measure

Jensen developed an absolute measure of performance to evaluate the investment

manager’s predictive ability i.e. ability to earn higher returns through successful
prediction of security prices, as given below:

Rp – Rf = α + βp (Rm - Rf) + ep

In this model, a positive alpha (α) value represents the average extra abnormal return
earned on a portfolio because of the investment managers’ superior predictive abilities.
The values were obtained by regression excess investment return (ex-post) against excess
return on market portfolio (independent variable).

Sharpe Ratio

The Sharpe Ratio is calculated by subtracting the risk-free – such as that of the 10 year
U.S. Treasury bond – from the rate return for a portfolio and dividing the result by the
standard deviation of the portfolio returns

= (rp – rf)/ σp
Where,

rp = Expected Portfolio return

rf = Risk free rate
σp = Portfolio standard deviation
The Sharpe ratio tells us whether a portfolio’s returns are due to smart investment
decision or a result of excess risk. This measurement is very useful because although one
portfolio of fund can reap higher than its peers, it is only a good investment if those
higher returns do not come with too much additional risk. The greater a portfolio’s
Sharpe ratio, the better is its risk-adjusted performance.
Treynor Ratio
The Trynor ratio is calculated as:

(Average Return of the portfolio – Average Return of the risk-free rate)/Beta of the
Portfolio

In other words, the Treynor ratio is a risk-adjusted measure of return based on systematic
risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses
beta as the measurement of volatility.

Sortino Ratio
It is computed by dividing the mean excess return by downside deviation of the fund’s
return from the risk free return.

SOi = (Ri - Rf)/DDi

Where DDi is estimated as follows:

DDi = [(1/n-1) ∑ (max (0,Rf - Ri j)2]1/2

The Sortino Ratio reports the fund’s mean return, in excess of the risk-free return
adjusted for the degree of downside risk in the fund. Downside risk focuses on the
likelihood of observing returns that fail to exceed the risk-free rate of return.