A five-minute guide to mutual fund ratios

Standard deviation shows the deviation of the fund returns around mean. It takes into account both the upside risk as well as the downside risk as it factors both the positive as well as the negative deviation of returns around mean.

Sharpe ratio is a measure of the risk-adjusted performance of a fund. It is measured by the formula: (Average Fund return – Risk free rate)/ Standard deviation of the fund returns

R – Squared shows the percentage of fund returns that can be explained by the benchmark returns. Its value lies between 0 and 100.

Beta reflects the fund risk in relation to the market as a whole. Beta of one means the volatility of the fund and the market are aligned. A Beta of less than one means that the fund’s returns are less volatile compared to the broader market. On the contrary, a Beta greater than one implies that the fund’s returns are more volatile relative to the broader market.

Treynor ratio is a measure of the risk-adjusted performance of a fund. It is measured by the formula
(Average Fund return – Risk free rate)/ Beta of the fund.

Information ratio measures the fund manager’s ability to generate risk-adjusted excess returns relative to the benchmark. It is measured by the formula
(Rp – RB)/Tracking error
Rp: Portfolio return
RB: Benchmark return
Tracking error: Standard deviation of the difference between portfolio returns and benchmark returns.

Sortino ratio is a measure of the risk adjusted performance of a fund. It is measured by the formula
Rp-Rf/Downside deviation
Rp = Fund return
Rf = Risk free rate
Downside deviation: Standard deviation of negative asset returns