PORTFOLIO EVALUATION

MUTUAL FUND
Mutual fund is an investment
vehicle that pools together
funds from investors to
purchase stocks, bonds or
other securities. An Investor
can participate in the mutual
fund by buying the units of the
fund. Each unit is backed by
A closed-end fund has a fixed
number of units outstanding. It
is open for specific period.
During that period investors
can buy it . The internal offer
period is terminated at the end
of the pre-determined period.
The closed end schemes are
listed in the stock exchanges.
The investor can trade the units
In the open-end schemes, units
are sold and brought
continuously. The investors
can directly can approach the
fund managers to buy or sell
the units. The price of the
units is based on the net asset
of the particular scheme. The
net asset value of the fund is
the value of the underlying
The mutual fund may be with or
without a load factor. A
commission or change paid by
the investors while purchasing
or selling the mutual fund is
known as load factor. Front-end
load is changed when units are
sold by the funds and back-end
load is changed when the units
are repurchased by the funds.
The front-end load factor
reduces the units when the
ADVANTAGES OF THE MUTUAL
FUNDS :
1.Professional manageme
2.Diversification
3.Convenient administrat
4.Return potential
5.Low costs
6.Liquidity
7.Transparency
8.Flexibility
9. Choice of scheme
10. Regulated
SHARPES PERFORMANCE INDEX
Sharpes performance index
gives a single value to be used
for the performance ranking of
various funds or portfolios.
Sharpe index measures the risk
premium of the portfolio
relative to the total amount of
risk in the portfolio. This risk
premium is the difference
between the portfolios average
 Rp - R f
St =
p

Sharpe Index = Portfolio average return-Risk free rate of interest

Standard deviation of the portfolio return
 R

A

nd
B
Fu Fu nd

p
Risk and Return for Funds A a
 TREYNORS PERFORMANCE
INDEX
To understand the Treynor index, an
investor should know the concept of
characteristic line. The relationship
between a given market return and
the funds return is given by the
characteristic line. The funds
performance is measured in relation
to the market performance. The ideal
funds return rises at a faster rate
than the general market
performance when the market is
 Funds Rate of Return
F
U
N
D
S
30
R
E
T Ideal Fund
U 20
R
N
10

-20 -10 0 10 20 30
Market Returns
With the help of the
characteristic line Treynor
measures the performance of
the fund. The slope of the line
Rp= by
is estimated : Rm + ep
Rp = Portfolio return
Rm= The market return or index return
ep = The error term or the residual
= Co-efficient to be estimated
 Market Return and Funds Ret
A

B
C
Funds return 40

30
20

10

-30 -20 -10 10 20 30 40 50 60

-10 Market return

-20
-30

-40
Beta co-efficient is treated as a
measure of undiversifiable
systematic risk.

Tn= Portfolio average return-riskless rate of interest

Beta co-efficient of portfolio

Rp - R f
Tn =
p
 Performance of Funds A and

R A
F und

8 u n d B
F
0.076
0.068
Rf5.0

0.5 1.0 1.5

p
JENSENS PERFORMANCE INDEX
The absolute risk adjusted
return measure was developed
by Michael Jensen and
commonly known as Jensens
measure. It is mentioned as a
measure of absolute
performance because a definite
standard is based on the
managers predictive ability.
Successful prediction of
 Rp= average return of portfolio
Rf= riskless rate of interest
Rp= (Rm- = the intercept
Rf ) = a measure of systematic risk
Rm= average market return

The return of the portfolio varies in the

same proportion of to the difference
between the market return and riskless
rate of interest. Beta is assumed to
reflect the systematic risk. The fund;s
portfolio beta would be equal to one if
it takes a portfolio of all market
securities. The would be greater than
Rp- Rf Funds Beta and Return

Rp = Rf + (Rm Rf)

0 (Rm Rf)
p

Rp = p + Rf + (Rm Rf)
By estimating this equation with
regression technique, Jensen
claimed a the constant, reflected the
professional managements ability to
forecast the price movements. A
Rp- Rf
comparative analysis of three
hypothetical funds CA,RB= and
p + R + (R R )
p C are
f m f

given in the figure. B R = R + (R R )

p f m f

A Rp = - p + Rf + (Rm Rf)

(Rm Rf)