Common Risk Parameters Investors Should Know

Why Risk Parameters Are Used

Beyond simple return figures, several statistical parameters help describe how consistently and efficiently a fund has historically achieved its results relative to risk taken. These are general, widely used concepts in fund analysis and are explained here for investor education only.

Standard Deviation

Standard deviation measures how much a fund's returns have varied around their average over a given period. A higher standard deviation generally indicates greater historical volatility.

Beta

Beta measures a fund's historical sensitivity to movements in its benchmark index. A beta above 1 suggests the fund has historically moved more than the benchmark; below 1 suggests less movement.

Sharpe Ratio

The Sharpe ratio looks at the return earned per unit of total risk taken, relative to a risk-free rate. It is commonly used to compare how efficiently different funds have historically converted risk into return.

Information Ratio

The information ratio measures a fund's historical excess return over its benchmark, relative to the consistency of that excess return (tracking error). A higher information ratio generally suggests more consistent outperformance relative to the benchmark, historically.

Treynor Ratio

The Treynor ratio is similar to the Sharpe ratio but uses beta, rather than standard deviation, as the risk measure, focusing on market-related risk specifically.

A Word of Caution

These parameters are calculated from historical data and do not predict future performance. They are best used as part of a broader understanding of a fund's category, mandate and risk profile, set out in the scheme's official documents.

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