Evaluation the performance of stock funds using multi-criteria decision-making methods

Abstract

Purpose- The aim of this study is to apply MCDM methods in addition to the traditional methods which are commonly utilized in evaluating the efficiency of stock funds. In this direction, starting from the fact that the normal distribution of stock returns, which is one of the assumptions of Modern Portfolio Theory, is mostly violated in practice, higher order moments are included in the objective functions of MCDM methods in addition to the first and second moments. Methodology-. In this study, in addition to the traditional performance measurement methods such as Sharpe Ratio, Information Ratio, Treynor Ratio and Jensen's Alpha; Adjusted Sharpe Ratio and TOPSIS, MOORA from MCDM methods are utilized by including high-order moments in addition to the first and second moments in the objective functions. In the next step, the ranking process was carried out with respect to traditional and recommended performance evaluation methods. Then, the rankings were evaluated using Spearman Rank Correlation Test. Findings- As a result of the analyses using the stock funds obtained from the TEFAS Turkey Electronic Fund Trading Platform for the period of 2018, 2019 and the first 9 months of 2020, ranking process is carried out using each methods’ and these rankings are compared using the Spearman Rank Correlation Test. According to the results of the Jarque-Bera test, it is seen that the majority of the stock funds included in the sample do not show normal distribution. This situation strengthens our hypothesis and emphasizes the necessity of including higher moments in the analysis. According to Spearman’s Rank Correlation Test results, strong relationships are found among the rankings obtained from traditional performance measurement methods. Moreover, it has been observed that the strength of the relationship between non-traditional methods and traditional methods is very weak. In other words, while the stock funds proposed by a traditional method were supported by other traditional methods, by making suggestions in a different direction TOPSIS and MOORA offered an alternative perspective considering the high-order moments. Conclusion- In this study, it is shown that the higher order moments and alternative ranking methods can be used in evaluating the performance of stock funds. In the view of both performance measurement and the portfolio selection window, these methods are considered to be useful in the analysis of stock funds. Accordingly, this study is intended to provide a perspective for equity fund managers, fund investors, and researchers to evaluate the effectiveness of stock funds.