Evaluating Risk Series: Measuring Benchmarks

Good financial advisors don’t just help clients reach their goals–they carefully analyze hundreds of funds and use complex, specific metrics to customize strategies for their clients. 

In the final installment of my blog series on evaluating risk, I explain how I use benchmarks like R-squared, Active Share, Tracking Error, Information Ratio, Capture Ratio and Correlation Coefficient to evaluate different funds and their managers.

The Hypotheticals

As in the first three parts of this series, consider this hypothetical case study:

  • Two hypothetical managers, Manager A and Manager B, have similar investment styles and measure their performance against the same hypothetical benchmark.
  • The risk-free rate of return is 3%
  • The most recent annual returns for each manager and the benchmark are listed below.

In the hypothetical above, all returns are provided gross of fees; investment management fees would otherwise reduce performance that an investor would experience.

Measuring Performance Compared to a Benchmark

For a comprehensive understanding of how I use various metrics to evaluate risks and help clients reach their financial goals, make sure to read the first three installments in this series: 
measuring returns, risk, and risk-adjusted returns.

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