How to measure the risk of a fund

Net Asset Value (NAV): The net value of each fund unit, which is equal to the balance of the fund's total assets minus its total liabilities divided by the total number of unit shares of the fund.

Net asset value of unit fund = (total assets - total liabilities) / total number of fund units

Cumulative net value of the fund: refers to the sum of the latest net value of the fund and the dividend performance since its establishment, reflecting The cumulative income obtained by the fund since its establishment (minus the face value of one yuan is the actual income) can more intuitively and comprehensively reflect the historical performance of the fund during its operation. Combined with the operation time of the fund, it can more accurately reflect the performance of the fund. True performance level. Generally speaking, the higher the cumulative net worth, the better the fund performance. It should be said that the latest net value mainly provides a real-time reference for transaction prices. When choosing a fund, investors should not just look at the latest net value and avoid being "cheap"; dividends can reflect the fund's profitability to a certain extent, but it mainly reflects Or is it the fund's ability to realize income? Dividend performance can actually be reflected by the cumulative net value. Therefore, from the perspective of investors comparing fund performance, the cumulative net value of the fund should be a more important indicator than the latest net value and dividends.

The quality of a fund cannot be judged simply from the unit net value, cumulative net value, growth value, and growth rate!

You should look at the benefits and risk factors together!

Risk coefficient is an indicator for evaluating fund risk, usually represented by "standard deviation", "beta coefficient" and "Sharpe index". Newbies only need to roughly grasp the following principles: the smaller the "standard deviation", the smaller the volatility risk (because the standard deviation is a measure of the volatility of the fund's return rate); the "beta coefficient" is less than 1, the smaller the risk (because the beta coefficient is a measure of the volatility of the fund's return rate) The sensitivity of the fund return rate to the relative index return rate. For example, if the beta coefficient of the entire market is 1, if the fluctuation of the fund's net value is greater than 1, it means that the fund's volatility risk is higher than the overall market); the higher the "Sharp Index", the better ( Because the Sharpe index measures the additional return earned by a fund per unit of risk, the higher the index, the higher the return of the fund after taking risk factors into account, and the more beneficial it is to investors).

Standard deviation, also known as volatility, refers to the deviation of a fund's weekly (or monthly) return from the average weekly return (or monthly return) over a period of time. The greater the volatility in a fund's weekly returns, the greater the standard deviation. For example, if Fund A has a weekly return of 1 for the past 52 weeks, its standard deviation is 0. The weekly return rate of Fund B is constantly changing. It is 5 one week, 25 next week, and -7 the next week. Then the standard deviation of Fund B is greater than the standard deviation of Fund A. And if Fund C loses 1 every week, its standard deviation is also 0.

The standard deviation of a single fund cannot indicate its level of risk. Investors should compare the standard deviation of a fund with the standard deviation of similar funds or performance evaluation benchmarks. For example, if the standard deviation of a certain fund is 25, is this volatility level high or low? If the standard deviations of other similar funds are mostly around 20, a volatility level of 25 is considered high. Another example is that you can find that the returns of two funds are similar, but the volatility levels are significantly different. For people who don’t like volatility, it is important to understand this. After all, not everyone is adapted to riding the fast train.

"Beta coefficient" is a statistical concept, a value between +1 and -1, which reflects the performance of an investment object relative to the broader market. The larger the absolute value, the greater the change in its earnings compared to the broader market; the smaller the absolute value, the smaller the change in earnings relative to the broader market. If it is a negative value, it shows that its direction of change is opposite to that of the broader market: it falls when the market rises, and rises when the market falls. Since our purpose of investing in investment funds is to obtain expert financial management services to achieve better performance than passive investment in the broader market, this indicator can be used to examine the fund manager's ability to reduce investment volatility risks.

When calculating the beta coefficient, in addition to the fund's performance data, there are also indicators that reflect the performance of the market.

Application of beta coefficient:

The beta coefficient reflects the sensitivity of individual stocks to changes in the market (or the broader market), that is, the correlation between individual stocks and the broader market or the "stock nature" in popular terms. . Securities with different beta coefficients can be selected based on market trend predictions to obtain additional income, which is especially suitable for band operations. When there is a high degree of confidence in predicting the arrival of a big bull market or a certain non-rising stage of the market, you should choose those stocks with high Securities with a beta coefficient will exponentially amplify market returns and bring you high returns; on the contrary, when a bear market arrives or a certain stage of decline in the market arrives, you should adjust your investment structure to resist market risks and avoid losses. , the method is to select securities with low beta coefficients. In order to avoid non-systematic risks, you can select securities with the same or similar beta coefficients for investment portfolios under corresponding market trends. For example: the beta coefficient of an individual stock is 1.3, indicating that when the market When it rises by 1, it may rise by 1.3, and vice versa; but if a stock's beta coefficient is -1.3, it means that when the market rises by 1, it may fall by 1.3. Similarly, if the market falls by 1, it may rise by 1.3. .

The fund's higher net value growth rate may be achieved while bearing higher risks. Therefore, it is not comprehensive to evaluate the fund's performance based only on the net value growth rate. When measuring fund performance, income must be taken into consideration. In terms of returns and risks, the Sharpe ratio is an indicator that can comprehensively consider returns and risks at the same time. The Sharpe ratio, also known as the Sharpe index, was first proposed by Nobel Prize winner William Sharpe in 1966. It has become the most commonly used standardized indicator in the world to measure fund performance.

Calculation and meaning of Sharpe ratio

The calculation of Sharpe ratio is very simple. Use the average of the fund's net value growth rate minus the risk-free interest rate and divide it by the standard deviation of the fund's net value growth rate. You can get the Sharpe ratio of the fund. It reflects the extent to which the growth rate of the net value of a unit risk fund exceeds the risk-free rate of return. If the Sharpe ratio is positive, it means that the average net value growth rate of the fund during the measurement period exceeds the risk-free interest rate. If the bank deposit interest rate in the same period is used as the risk-free interest rate, it means that investing in funds is better than bank deposits. The greater the Sharpe ratio, the higher the risk-return obtained from the fund's unit risk.

The theoretical basis for ranking fund performance by the size of the Sharpe ratio is to assume that investors can borrow and borrow at risk-free interest rates. In this way, by determining an appropriate financing ratio, funds with a high Sharpe ratio can always Obtain higher investment returns than funds with a low Sharpe ratio with the same risk. For example, suppose there are two funds A and B. The average annual net value growth rate of fund A is 20% and the standard deviation is 10%. The average annual net value growth rate of fund B is 15% and the standard deviation is 5%. The risk interest rate is 5%, then the Sharpe ratios of Fund A and Fund B are 1.5 and 2 respectively. According to the Sharpe ratio, the risk-adjusted return of Fund B is better than that of Fund A. In order to explain this more clearly, we can invest the same amount of funds (financing ratio is 1:1) at the level of risk-free interest rate and invest in B. Then, the standard deviation of B will double to reach the same level as A. The same level, but at this time the net value growth rate of B is equal to 25% (ie 2#15%-5%), which is greater than that of Fund A. It is more common to use the monthly Sharpe ratio and the annual Sharpe ratio.

Use the Sharpe ratio to measure the performance of my country's funds

Internationally, the 36-month net worth growth rate and the 3-month short-term government bond interest rate are generally used to calculate the Sharpe ratio. However, due to my country's securities investment funds only announce their net worth once a week, and have a short development history. Only a few funds have 36 monthly net worth data. Therefore, in the calculation of the Sharpe ratio, we use 4 weeks as one month for the last 12 months. Monthly net worth growth rate serves as the basis for calculation. In addition, since my country has not yet issued short-term treasury bonds, the Shanghai Stock Exchange’s 28-day treasury bond repurchase rate was used in the selection of risk-free rate of return.

Here we used October 27, 2000 to October 26, 2001 as the investigation period, and calculated the Sharpe ratios of 30 funds (see attached table).

It was found that the monthly Sharpe ratios of all funds were negative, indicating that the investment performance of the funds was not as good as that of government bond repurchases. When the Sharpe ratio is negative, sorting by size makes no sense.

The average monthly net value growth rate of a fund is an absolute measure of fund performance. From this indicator, Fund Xinghua, Fund Tongzhi, and Fund Xinghe performed best, while Fund Jinghong and Fund Kaiyuan performed best. , Fund Hanxing is the worst. It can be seen that except for the monthly average net value growth rate of the two funds, Fund Xinghua and Fund Tongzhi, the monthly average net value growth rate of the other 28 funds all showed negative growth, indicating that the investment performance of the funds as a whole was unsatisfactory.

Using standard deviation as a measure of fund risk, Fund Yuhua, Fund Tongzhi, and Fund Xinghe have the lowest net value volatility and the smallest risk. Fund Jinyuan, Fund Taihe, and Fund Kaiyuan have the lowest net value fluctuations. Sex is the most risky.

The Spearman rank correlation coefficient between the monthly average net value growth rate and the standard deviation of the 30 funds is -0.54, indicating that the fund's income and risk show a strong negative correlation, that is, the greater the risk, the greater the risk. The lower the fund's net value growth rate. This relationship is contrary to the normal risk-return relationship, indicating that my country's securities investment funds are not an effective investment portfolio on average, and the portfolio efficiency is poor.

Issues that should be paid attention to when using the Sharpe ratio

Although the calculation of the Sharpe ratio is very simple, the applicability of the Sharpe ratio still needs to be paid attention to in specific applications: 1. Using standard deviation to risk-adjust returns implicitly assumes that the portfolio under examination constitutes the entire investor's investment. Therefore, the Sharpe ratio can be used as an important basis only when considering purchasing a certain fund among many funds; 2. The use of standard deviation as a risk indicator is also considered inappropriate. 3. The effectiveness of the Sharpe ratio also relies on the assumption that borrowing and lending can be made at the same risk-free interest rate; 4. The Sharpe ratio has no base point, so its size itself is meaningless and is only valuable in comparison with other portfolios; 5. The Sharpe ratio is linear, but the transformation between risk and return on the efficient frontier is not linear. Therefore, the Sharpe index is biased in measuring the performance of funds with large standard deviations; 6. The Sharpe ratio does not consider the correlation between portfolios, so there are big problems in constructing portfolios purely based on the size of the Sharpe value; 7. Sharpe ratio The ratio, like many other indicators, measures the historical performance of the fund, so future operations cannot simply be based on the historical performance of the fund. 8. In terms of calculation, the Sharpe Index also has a stability problem: the calculation results of the Sharpe Index are related to the time span and the selection of the time interval for income calculation.

Although the Sharpe ratio has many of the above limitations and problems, it is still widely used in practice because of its simplicity in calculation and the fact that it does not require too many assumptions.