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Analyzing a Managed Account Return
We all know that past performance is no guide to future success but it is always good to have an idea of how a fund has performed in the past generally, in relation to the market that it is invested in and finally, how volatile the investment is overall.
Below you will find some standard methods of assessing the performance of an investment.
This is one of the most important considerations for investors.
A drawdown is simply the fall in value of an investment and gives an indication of downside losses that can be expected in the future.
A peak to valley shows the worst period of return of an investment i.e what your losses would have been had you invested at the worst possible time.
2. Sharp Ratio
Is a risk-adjusted tool developed by William F. Sharpe, calculated using standard deviation and excess return to determine reward per unit of risk?
The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance will be.
3. Sortino Ratio
A variation of the Sharpe ratio which, differentiates between harmful volatility from volatility in general.
This is done by replacing standard deviation with downside deviation in the calculation.
The Sortino Ratio is calculated by subtracting the risk free rate from the return of the overall portfolio and then dividing this by the downside deviation.
The Sortino ratio measures the return to "bad" volatility.
This ratio allows investors to see risk in a better way than simply looking at excess returns to total volatility.
The reason for this is such a measure does not consider how often the price of the investment rises as opposed to how often it falls.
In conclusion a large Sortino Ratio indicates that there is a low risk of large losses occurring in the future.
Benchmarks are a way of comparing investments to others.
There are two normal benchmarks used:
Benchmark for Correlation Values: The benchmark that the investment has chosen to run correlation values such as alpha, beta, R and R squared.
Benchmark for Graphing: The benchmark that the investment has chosen to graph itself against as a comparison.
Beta is the measure of a fund's volatility relative to the market.
For example the majority of fund managers correlate themselves to the S&P 500.
A beta of greater than 1.0 indicates that the fund is more volatile than the market, and less than 1.0 is less volatile than the market.
For example, if the market rises 2% and a fund has a beta greater than 2.8, the fund will rise, on average, 2.8%. For a fund with a beta of 0.5, if the market rises 2%, the fund will rise on average, 1.5%.
The relationship is the same in a falling market.
Investments can have a negative beta, meaning that on average they rise when the market falls and vice versa.
In conclusion using the above tools to see how an investment performs will allow you to select investments that have performed well against the market and other funds, assess how volatile the fund is and what you are likely to see in the future.
As a general rule the longer the period of analysis the more accurate the figures will tend to be in evaluating future performance.
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