Appraisal Ratio – Definition

Cite this article as:"Appraisal Ratio – Definition," in The Business Professor, updated February 24, 2020, last accessed June 1, 2020, https://thebusinessprofessor.com/lesson/appraisal-ratio-definition/.

Back to: ECONOMICS, FINANCE, & ACCOUNTING

Appraisal Ratio Definition

An appraisal ratio can be used in different contexts to describe or measure the performance of a fund compared to the benchmark. The appraisal ratio also measures a mutual fund’s alpha relative to its risk. This ratio also measures the performance of a fund manager by evaluating how his investment strategies are faring. The investment selection ability of a fund manager can be evaluated given the performance of the investments. Essentially, the appraisal ratio compares the alpha of a fund to its residual standard deviation otherwise known as risk.

While the alpha is the amount of return an investment earns that surpasses the benchmark, the residual standard deviation measures the relative risk of the investment.

A Little More on What is an Appraisal Ratio

The appraisal ratio is often used to determine how effective a fund manager’s investment-selection ability is. It compares the performance of return of a given fund to the benchmark and also companies the return to the unsystematic risk. Generally, fund managers want to have returns that surpass the market benchmark, this goal informs their decisions when it comes to investment selection. The appraisal ratio gives an insight into the performance of a fund manager by examining the return of the selected investments against their underlying risks.

Reference for “Appraisal Ratio”

https://www.investopedia.com/terms/a/appraisalratio.asp

https://investinganswers.com/financial-dictionary/mutual…/appraisal-ratio-2569

https://www.coursera.org/lecture/…/appraisal-ratio-and-information-ratio-7R48I

www.mysmp.com/mutual-funds/appraisal-ratio.html

https://financial-dictionary.thefreedictionary.com/Appraisal+ratio

Academics research on “Appraisal Ratio”

[PDF] Performance evaluation of Norwegian and global mutual funds: 1999-2006, Daphu, R. K. (2007). Performance evaluation of Norwegian and global mutual funds: 1999-2006 (Master’s thesis). In this study I evaluate the performance of a sample of eight Norwegian mutual funds and eight  global mutual funds over the period January 1999 to June 2006. Norwegian mutual funds invest in companies, which are listed on the Oslo Stock Exchange and global mutual funds  invest in companies in USA, Europe, Asia and South America. This study examines the riskadjusted returns using Sharpe’s ratio, Treynor’s ratio, Jensen’s measure, Appraisal Ratio and  Modigliani and Modigliani measure for these Norwegian and Global mutual funds. The analysis will focus on the funds performances in the form of risk-adjusted return. In the empirical examination, I have used arithmetic risk-adjusted monthly return. The purpose is to  compare the performances of global mutual funds and domestic mutual funds and seeks to test whether the mutual funds achieve a higher risk-adjusted excess return than the market and if the mutual funds have the same risk profile and investment strategy as they claim. On the basis  of the results I found in the empirical analysis, I conclude that only a few funds managed to generate a risk-adjusted excess return corresponding to the fund’s investment strategy and profile and few funds have the same risk profile as they claim.

Cost of time and household choice between direct and delegated investment, Zhu, N. (2005). Cost of time and household choice between direct and delegated investment. This study investigates households’ decision between direct equity investment and indirect investment through mutual funds. We present evidence that the tendency to invest through delegated portfolio management (i.e. mutual funds) versus direct investing is significantly influenced by households’ cost of time. Households with greater professional engagement, personal responsibilities, and less leisure time, proxies for higher cost of time, invest more in mutual funds relative to direct investment. The results are robust when controlling household risk-aversion and investment abilities. The findings underscore how search costs influence household financial decision-making and the growth of mutual fund industry.

Upside potential of hedge funds as a predictor of future performance, Bali, T. G., Brown, S. J., & Caglayan, M. O. (2019). Upside potential of hedge funds as a predictor of future performance. Journal of Banking & Finance98, 212-229. This paper investigates the relationship between upside potential and future hedge fund returns. We measure upside potential based on the maximum monthly returns of hedge funds (MAX) over a fixed time interval, and show that MAX successfully predicts cross-sectional differences in future fund returns. Hedge funds with strong upside potential generate 0.70% per month higher average returns than funds with weak upside potential. After controlling for alternative risk and performance measures, funds’ market-timing ability, and a large set of fund characteristics, the positive link between MAX and future returns remains highly significant. We conclude that MAX, as a simple proxy for realized noln-normalities in hedge funds, offers incremental information on future hedge fund returns above and beyond provided by standard risk, performance, and market-timing measures.

Investment gaps after the crisis, Lewis, C., Pain, N., Stráský, J., & Menkyna, F. (2014). Investment gaps after the crisis.Analysing higher-value wildlife as an investment alternative, Van Wyk, G. J. (2015). Analysing higher-value wildlife as an investment alternative (Doctoral dissertation)

Was this article helpful?