Risk-adjusted Performance Measures Research Articles

PERFORMANCE EVALUATION OF SIP AND LUMP-SUM INVESTMENT: A STUDY OF SMALL CAP MUTUAL FUNDS

In this paper, the Performance of 13 open-ended equity small cap schemes related to thirteen private sector mutual funds are evaluated i.e. ABSL Mutual fund, Axis Mutual Fund, DSP Mutual fund, Franklin templeton mutual fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mahindra Mutual Fund, HSBC Mutual Fund, Nippon India Mutual Fund, Quant Mutual Fund, SBI Mutual Fund, Sundaram Mutual Fund and Union Mutual Fund. The study period covers the period from 1stApril 2016 to 31st March 2023. For evaluating the performance of the selected mutual fund schemes, month-wise returns are compared with Benchmark- S&P BSE Small Cap Index return. The rate which has no risk i.e. Risk Free Rate has been taken as average fixed deposit rate of SBI (State bank of India). Further, various different types of statistical tools like average, standard deviation, IRR, beta and the risk adjusted performance measures suggested by Sharpe (1966), Jenson (1968), and Treynor (1965) are employed to evaluate the performance for the above selected period. In this paper SIP and lump-sum investment returns are also compared of the above selected small cap schemes.

A Re-examination of Housing Investment Performance in Nigeria

Arising from the lack of a holistic performance analysis of housing investment in Nigeria, this paper re-examines the return-risk performance of residential property assets by focusing on the tier 1 property markets of Lagos, Abuja, and Port Harcourt. Data on the rental and capital values of residential property assets, comprising bungalows, blocks of flats, and detached houses, from 1999 to 2022 were obtained from estate surveying and valuation firms in the three locations. Mean return and standard deviation were employed to analyse return and risk profiles. Variations in return and risk profiles were further examined using a four-year sub-period analysis. The return-risk ratio was also employed to measure the attractiveness of the investment. The downside risk measure of the Sortino ratio was utilised to determine the risk-adjusted performance of the residential property assets. The results revealed that, on mean return and return-risk tradeoff bases, bungalow investments had superior performance compared with other property types across the geographic areas. When aggregated, residential property assets in Port Harcourt experienced superior return-risk performance relative to other locations. On sub-period analysis, the study established variations in the performance of the residential property assets across time periods and locations. On the risk-adjusted performance measure, it was found that bungalows in Lagos had the highest risk-adjusted performance. Detached house investments across the three locations were also found to exhibit low downside risk-adjusted performance. The study concluded that investors could gain high and attractive returns when making bungalow housing investment decisions with a huge potential for downside risk-proof returns. Moreover, investors could further expand this potential by concentrating more housing investment activities in Port Harcourt, as returns in this location are insulated from downside risk. However, investors should be cautious when investing in detached house assets across the three locations, as returns from this asset might be susceptible to downside risk.

Emerging paradigms in socially responsible investment (SRI)—A study with focus on ESG mutual funds in India

Socially Responsible Investment (SRI) is an emerging investment avenue in India, encompassing various Environmental, Social, and Governance (ESG) mutual funds within the financial markets. This study adopts both an exploratory and empirical approach, aiming to provide historical insights into the landscape of SRI within India’s financial markets. The study’s objectives include elucidating the concept of SRI, assessing the performance of selected ESG funds in India, and examining the opportunities and challenges within this domain. To evaluate the effectiveness of Environmental, Social, and Governance (ESG) funds, the study employs various risk-adjusted performance measures. Notably, the ICICI Prudential ESG Fund in the Direct Plan-Growth (FDPG) option demonstrates superior overall performance compared to other selected ESG fund schemes in India. Conversely, the Aditya Birla Sun Life ESG FDPG option ranks as the least performer when contrasted with other schemes within the Direct Plan-Growth category.

Can equity mutual funds outperform the benchmark and simple passive portfolios?

This study evaluates the risk-adjusted performance of equity mutual funds in Nigeria against the market benchmark and two alternative passive portfolios available to investors. Data on monthly net asset values (NAVs) of 30 actively managed, equity-based mutual funds that operated in Nigeria between 2012 and 2021 were collected and analyzed. Risk-adjusted performance measures including the Treynor ratio, Sharpe ratio, Jensen’s alpha, information ratio, Modigliani–Modigliani (M2) measure, Sortino ratio, and the Fama-French 3-factor regression model are used to evaluate the performance of mutual funds. Evidence shows that the Nigerian equity mutual fund portfolio does not deliver excess risk-adjusted returns, and underperforms the three simple passive portfolios against which it was benchmarked. However, mutual fund portfolios provide robust, low-cost diversification benefits and could be considered as part of a well-diversified portfolio of assets. This study explores investment strategies, with practical implications for investors, industry professionals, regulation, and academia. It provides a useful guide to retail investors and their advisers on managing their investment portfolios in the Nigerian stock market. In addition, it validates the veracity of the efficient-market hypothesis (EMH), implying that, on average, seeking alpha is, perhaps, a futile effort.

Impact of Movement Control Order on Risk-Adjusted Performance of the Malaysian Real Estate Investment Trusts (M-REITs)

The first Movement Control Order (MCO) implemented by the Malaysian government from 18th March 2020 to 3rd May 2020 was unprecedented. Since Malaysia was only mildly affected by previous epidemics or pandemics unlike the COVID-19, studies of the pandemic impact on the performance of Malaysian firms and M-REITs in specific were limited. To close this gap, this study compares Sharpe ratio, Treynor ratio and Jensen Alpha ratio of 18 M-REITs for sub-periods before, during and after the MCO. Paired sample t-test results for all these three risk-adjusted performance measures consistently show that M-REITs significantly performed better during the MCO compared to before the MCO as well as after the MCO compared to before the MCO. The results suggest that the business model and portfolio of real estate managed by M-REITs are resilient against both systematic and unsystematic risk factors, and imply that the intrinsic value of M-REITs is not significantly affected by the market uncertainty caused by movement restriction. The findings also bolster investors’ confidence to include M-REITs as part of their diversified investment portfolio to achieve sustainable return performance in the post-Covid period. To remain resilient and sustainable, the management of M-REITs should diversify the portfolio of properties and real estate they managed since the movement restriction had varying repercussions on different types of real estate. Rooms for further diversification are justified by a larger percentage of M-REITs having positive Treynor ratios after the MCO sub-period if compared to positive Sharpe ratios. A well-diversified portfolio managed by an M-REIT can reduce unsystematic risk, which is part of the total risk measured by standard deviation, eventually moving towards a positive Sharpe ratio.

Does Islamic investing modify portfolio performance? Time-varying optimization strategies for conventional and Shariah energy-ESG-utilities portfolio

This paper aims to assess the performance of Islamic portfolios vis-à-vis their conventional counterparts across two distinct periods: the pre-COVID-19 era and the COVID-19 era. Departing from prior studies, this study makes a novel contribution by employing an extensive array of 18 portfolio optimization techniques to construct optimal portfolios for conventional stock indices encompassing energy, utilities, and environmental, social, and governance (ESG) dimensions, as well as their Islamic equivalents. Performance comparisons are made utilizing three risk-adjusted performance measures, namely the Sharpe ratio, the Omega ratio, and the Sortino ratio. Our findings reveal that Shariah portfolios outperform conventional portfolios across all performance measures and risk-aversion levels when the most effective optimization methods are employed, both during pre-crisis and crisis periods. Additionally, our analysis highlights certain methods, namely EWMA, GM, DCC, and SHC, which produce portfolios exhibiting superior performance relative to alternative methods, as assessed by risk-adjusted metrics. Furthermore, Islamic portfolios demonstrate higher average returns compared to their conventional counterparts. Notably, incorporating ESG-related stocks into energy and utilities assets significantly enhances average returns, underscoring the potential of ESG investments. Collectively, our findings have noteworthy implications for investors, as they emphasize the role of Islamic stocks as effective diversifiers, yielding favorable resource allocation opportunities during times of crisis as well as stability. However, investors should exercise caution in selecting the optimal portfolio optimization method, as substantial performance disparities exist among different approaches.

Is anti-herding always a smart choice? Evidence from mutual funds

Recent empirical studies document a negative relation between herding behaviour and the skill of mutual fund managers. We explore this relationship further by focusing on fund managers' contrarian buy and sell behaviour against the market. Our study reveals an asymmetry in the performance of mutual funds with contrarian buy behaviour and contrarian sell behaviour. The contrarian-buy behaviour reflects skill by positively predicting the cross-section of next period's mutual fund returns, while the contrarian-sell behaviour reflects a lack of skill associated with a negative prediction. These findings are robust to various risk-adjusted performance measures. Contrarian-buy funds outperform momentum-buy funds by 3% per year, while contrarian-sell funds underperform momentum-sell peers by about 4%. These findings are robust across different sizes and styles of mutual funds. Further analysis indicates that the asymmetric effect is reversed during recessions and disappears when market sentiment is high. We also study how mutual fund characteristics relate to contrarian buy and sell practices. We find that mutual funds with larger size, higher flow, lower tracking error, and no manager ownership are more likely to buy against the crowd but sell with the crowd.

The Impact of the Financial and the Health Crisis on Listed Hotel Stocks

Abstract Travel and tourism represent one of the largest industries in the world as far as percentages of GDP and occupation are concerned, consequently, asset managers could be interested to select listed hotel stocks in their portfolios. The hotel industry has shown some difficulties not only in periods of financial, but also during the health crisis (Covid-19), when global and local restrictions on travel and tourism had a negative effect on the hotel sector. This study aims to analyze how listed hotel stocks could improve their contribution to portfolio diversification in different stages of the market. First, we use a constraint mean-variance approach to analyze the effect of diversification, and then we study the difference in the performance of the hotel sector by using the Risk-Adjusted Performance (RAP) measure. We analyze three sample periods: a) the whole sample (01/2000-09/2021); b) the Financial Crisis sample (06/2007-06/2012) and c) the COVID sample (02/2021-09/2021). Our findings contribute to a good understanding of financial patterns in the hotel industry as an asset class at different stages and support our hypothesis of its possible positive contribution in terms of diversification and performance. JEL classification numbers: G11, G12, G15 Keywords: Portfolio Management, Hotel Stocks, Financial Crisis, Health Crisis, Tourism.

The Impact of the Financial and the Health Crisis on Listed Hotel Stocks

Abstract Travel and tourism represent one of the largest industries in the world as far as percentages of GDP and occupation are concerned, consequently, asset managers could be interested to select listed hotel stocks in their portfolios. The hotel industry has shown some difficulties not only in periods of financial, but also during the health crisis (Covid-19), when global and local restrictions on travel and tourism had a negative effect on the hotel sector. This study aims to analyze how listed hotel stocks could improve their contribution to portfolio diversification in different stages of the market. First, we use a constraint mean-variance approach to analyze the effect of diversification, and then we study the difference in the performance of the hotel sector by using the Risk-Adjusted Performance (RAP) measure. We analyze three sample periods: a) the whole sample (01/2000-09/2021); b) the Financial Crisis sample (06/2007-06/2012) and c) the COVID sample (02/2021-09/2021). Our findings contribute to a good understanding of financial patterns in the hotel industry as an asset class at different stages and support our hypothesis of its possible positive contribution in terms of diversification and performance. JEL classification numbers: G11, G12, G15 Keywords: Portfolio Management, Hotel Stocks, Financial Crisis, Health Crisis, Tourism.

Performance Evaluation of Mutual Funds Using Risk Return Relationship Models - An Empirical Study

Purpose: The main purpose of this study is to analyse the performance of mutual funds using Risk- Return Relationship Models. Theoretical framework: One of India's most important financial intermediaries, mutual funds can provide a wide range of financial services to small and large investors. They are also involved in the country's transformation, and their market participation has become more important. Evaluating a mutual fund's performance concerns investors, researchers, and fund managers. It should be conducted in a way that helps investors make informed decisions and maximize returns. A regular evaluation of a fund's performance is also essential for investors. Design/methodology/approach: The performance of 12 growth-oriented mutual funds has been evaluated using three Risk Adjusted performance measures, namely the Treynor index, Sharpe index, and Jensen measure. Treynor Index, developed by Treynor and Mazuy (1966), defined the measure as the ratio of returns to systematic Risk (Beta). The higher the ratio better the performance. Sharpe Index, developed by Sharpe (1964) defined as the ratio of returns to the variability of returns. Jensen's measure (Jensen 1968) regresses excess fund return with the excess market return. Monthly data was used during the period from Jan 2015 to Dec 2019. Further monthly returns of 12 diversified Equity mutual funds were compared with the returns of the B.S.E.( Bombay Stock Exchange) national index during the same period. Findings: It is identified from the results that the mutual funds have not performed better than their benchmark indicators except the ICICI Multi-asset fund and HDFC mid-cap opportunity fund in terms of a non-risk adjusted measure of the average returns as well as in terms of Risk-adjusted performance measures. Research, Practical & Social implications: Fund houses, Fund managers, researchers, and mutual fund investors can benefit more from a strong risk management foundation. It can help them make informed decisions and maximize their returns. Originality/value: This study differs from past studies because it examined the risk-adjusted performance of a few mutual funds, which ultimately may use by investors and policymakers to enhance the returns in these funds.

Performance Evaluation of Selected Open-Ended Mutual Fund Schemes in India

Abstract: Mutual funds are considered as the best investment option because they offer a higher return with little risk. The study’s main aim is to evaluate the performance of selected large and small cap equity mutual fund schemes. The performance has been analysed in terms of return and risk using risk-adjusted performance measures. The present study is descriptive and secondary data has been collected from the website of BSE, NSE and Mutual funds. The analysis shows that “HDFC Top 100 Fund - Growth Option - Direct Plan” is top large cap mutual funds scheme and “Tata Small Cap Fund-Direct Plan-Growth” is top small cap mutual funds scheme among the selected funds as per Sharpe, Treynor and Jenson ratio.

Kurtosis-based risk parity: methodology and portfolio effects

In this paper, a risk parity strategy based on portfolio kurtosis as reference measure is introduced. This strategy allocates the asset weights in a portfolio in a manner that allows an homogeneous distribution of responsibility for portfolio returns' huge dispersion, since portfolio kurtosis puts more weight on extreme outcomes than standard deviation does. Therefore, the goal of the strategy is not the minimization of kurtosis, but rather its ‘fair diversification’ among assets. An original closed-form expression for portfolio kurtosis is devised to set up the optimization problem for this type of risk parity strategy. The latter is then compared with the one based on standard deviation by using data from a global equity investment universe and implementing an out-of-sample analysis. The kurtosis-based risk parity strategy has interesting portfolio effects, with lights and shadows. It outperforms the traditional risk parity according to main risk-adjusted performance measures. In terms of asset allocation solutions, it provides more unbalanced and more erratic portfolio weights (albeit without excluding any component) in comparison to those pertaining the traditional risk parity strategy.

How do noninterest income activities affect bank holding company performance?

We investigate whether noninterest income activities affect bank performance measures, and we present evidence consistent with the theory that synergy between interest and noninterest income improves performance. A decomposition of ROA into cost and revenue ratios reveals that the improved performance associated with noninterest income arises mainly through revenue efficiency. We find consistent results using a risk-adjusted performance measure. Our results also show that noninterest income activities do not adversely affect BHC performance during the 2008 financial crisis, and in some cases, they even improve performance. Our findings help inform policymakers regarding regulations permitting bank participation in noninterest income activities.

Did ESG portfolio augment investors’ wealth during Covid19? Evidence from Indian stock market

Purpose This paper aims to empirically examine the performance of the high-ESG (environment, social and governance) portfolio vis-à-vis the low-ESG portfolio at the Indian stock market before and during the Covid19 pandemic. Design/methodology/approach The absolute rate of return and several risk-adjusted performance measures, for instance, Sharpe ratio, Modigliani–Modigliani measure, Treynor ratio, Jensen’s alpha, information ratio, Fama’s decomposition measure and Fama and French’s three-factor model, have been used in this study along with the t-test. Findings All three indices (CARBONEX, GREENEX and BSE 500) had better returns during Covid19 period as compared to the pre-Covid19 period. However, these returns were not statistically significant. During Covid19, the risk of the indices also rose, but they provided better returns for the additional risk taken. Finally, it is concluded that the performance of high-ESG and low-ESG stock portfolios did not differ significantly in both periods. Practical implications The study is relevant to individual and institutional investors, financial advisors, portfolio managers, corporations, policymakers, market regulators and society at large. Social implications This study emphasized the need to expand the role of ESG investment in India for the benefit of people, communities and society as a whole. Originality/value This research is the first of its kind, to the best of the authors’ knowledge, that compares the performance of a high-ESG portfolio with a low-ESG portfolio both before and during the Covid19, particularly in the Indian context.

Investment Performance and Tracking Efficiency of Indian Equity Exchange Traded Funds

Exchange Traded Funds (ETF’s) are one of the beloved passively managed funds that offer both retail and institutional investors an access to highly profitable and wide- range of diversifiable financial assets. The study aims to assess the ability of Indian equity ETF’s in replicating the performance of their benchmark indices using a sample of 27 equity ETF’s traded on the National Stock Exchange of India during the pre-pandemic period from 01/01/2015 to 31/12/2019. Evaluation of the performance of sample ETF’s through risk-return analysis, risk-adjusted performance measures, tracking error analysis and multi-factor regression have revealed that the majority of the sample ETF’s outperformed their tracking indices but with notable tracking errors during the study period. Further, the study also indicates that the returns of the sample ETF’s have a significant and positive relationship with the returns of the index but are inversely related to risk and management fees. The results of this study will have major implications for investors in evaluating the performance of ETF’s and fund managers as well in taking suitable measures to reduce tracking errors that will help in successful replication of the benchmark along with undertaking initiatives that will enable the ETF’s to become price efficient.

Can The Easing Of COVID-19 Restrictions Enhance the Performance of Sectors in The Stock Market?

COVID-19 pandemic has affected stock prices in many sectors of financial markets and this can be seen in many countries all over the world. The main enquiries in this study included whether the negative effect of COVID-19 pandemic was converted into a positive reaction in the financial markets after the restriction related to the pandemic were gradually relaxed and which sectors were more affected by this relaxation. These inquiries were investigated through examining the case of the state of Qatar because it has an attractive investment environment as the richest country in the Arab world. Quantitative method was followed to answer the enquiries of this study by testing the performance of the stock indices in the sectors of Qatari market for the period from 25 April, 2021 to 18 November, 2021. The performance of the index of each sector was measured using risk-adjusted performance measures. Data of the study were analyzed using Friedman test. Study results revealed that the gradual lifting of the restrictions has positively affected the performance of the sectors in the stock market and that the magnitude and direction of the effect was different on each sector.

Predictability of bull and bear markets: A new look at forecasting stock market regimes (and returns) in the US

The empirical literature of stock market predictability mainly suffers from model uncertainty and parameter instability. To meet this challenge, we propose a novel approach that combines dimensionality reduction, regime-switching models, and forecast combination to predict excess returns on the S&P 500. First, we aggregate the weekly information of 146 popular macroeconomic and financial variables using different principal component analysis techniques. Second, we estimate Markov-switching models with time-varying transition probabilities using the principal components as predictors. Third, we pool the models in forecast clusters to hedge against model risk and to evaluate the usefulness of different specifications. Our weekly forecasts respond to regime changes in a timely manner to participate in recoveries or to prevent losses. This is also reflected in an improvement of risk-adjusted performance measures as compared to several benchmarks. However, when considering stock market returns, our forecasts do not outperform common benchmarks. Nevertheless, they do add statistical and, in particular, economic value during recessions or in declining markets.

Cost‑Effectiveness Risk‑Aversion Curves: Comparison of Risk-Adjusted Performance Measures and Expected-Utility Approaches.

Accounting for risk attitudes in medical decision making under uncertainty has attracted little research. A recent proposal recommended using the results of a cost-effectiveness analysis to construct a cost-effectiveness risk-aversion curve (CERAC) to inform risk-averse decision makers choosing among healthcare programs with uncertain costs and effects. The CERAC is based on a risk-adjusted performance measure widely used in financial economics called the Sortino ratio. This paper evaluates the CERAC based on the Sortino ratio, derives its various properties, discusses the implications of using it to inform decision making under uncertainty, and compares it with the expected-utility approach. Analytic formulae for the CERAC, relating it to the means and standard deviations of costs and effects of a healthcare program, are derived for both approaches. Compared with the expected-utility approach, the CERAC based on the Sortino ratio implicitly assumes that the decision maker is highly risk averse.

Determinants of Malaysian Real Estate Investment Trusts (M-REITs) Risk-Adjusted Performance during the Period of Property Oversupply

After the remarkable property surge in the first half of 2010s decade (2010-2014), the Malaysian property market has then moved into a period of oversupply and price overhang, which pose more challenges for REIT managers. Unlike most previous research that mainly compared various risk-adjusted performance measures among REITs, this research looks into whether size of portfolio, fundamental performance measures (net property income and dividend yield) and types of property managed by REITs influence their risk-adjusted performance measure of Jensen alpha. Based on a sample of 16 Malaysian REITs over the period 2015-2017, regression results generally show that there is no significant relationship between any of these determinants and Jensen alpha. Furthermore, only one out of the 16 M-REITs has a positive Jensen alpha and outperforms the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index. Investors who prefer a high and certain dividend yield can consider to invest in M-REITs that mainly focused in the hospitality sector. Based on the rankings of Jensen alpha, M-REIT fund managers can consider to diversify their property portfolios to include more retail and hospitality properties during the period of property oversupply.

Residual Confounding in Health Plan Performance Assessments: Evidence From Randomization in Medicaid.

Risk adjustment is used widely in payment systems and performance assessments, but the extent to which it distinguishes plan or provider effects from confounding due to patient differences is typically unknown. To assess the degree to which risk-adjusted measures of health plan performance adequately adjust for the variation across plans that arises because of differences in patient characteristics (residual confounding). Comparison between plan performance estimates based on enrollees who made plan choices (observational population) and estimates based on enrollees assigned to plans (randomized population). Natural experiment in which more than two thirds of a state's Medicaid population in 1 region was randomly assigned to 1 of 5 plans. 137933 enrollees in 2013 to 2014, of whom 31.1% selected a plan and 68.9% were randomly assigned to 1 of the same 5 plans. Annual total spending (that is, payments to providers), primary care use, dental care use, and avoidable emergency department visits, all scored as plan-specific deviations from the "average" plan performance within each population. Enrollee characteristics were appreciably imbalanced across plans in the observational population, as expected, but were not in the randomized population. Annual total spending varied across plans more in the observational population (SD, $147 per enrollee) than in the randomized population (SD, $70 per enrollee) after accounting for baseline differences in the observational and randomized populations and for differences across plans. On average, a plan's spending score (its deviation from the "average" performance) in the observational population differed from its score in the randomized population by $67 per enrollee in absolute value (95% CI, $38 to $123), or 4.2% of mean spending per enrollee (P= 0.009, rejecting the null hypothesis that this difference would be expected from sampling error). The difference was reduced modestly by risk adjustment to $62 per enrollee (P= 0.012). Residual confounding was similarly substantial for most other performance measures. Further adjustment for social factors did not materially change estimates. Potential heterogeneity in plan effects between the 2 populations. Residual confounding in risk-adjusted performance assessments can be substantial and should caution policymakers against assuming that risk adjustment isolates real differences in plan performance. Arnold Ventures.