Monday, June 18, 2007

Unit Trust (Part 3)

How to measure Unit Trust Risk?
1) Standard Deviation of Returns
Measures the dispersion or spread of Unit Trust's Returns about its arithmetic mean returns.
* Higher Standard Deviation = Higher Risk
2) Beta
Measures the responsiveness of a Unit Trust's returns to changes in the returns on the market index.
Stock market has a beta equal to one. If UT has a beta greater than one, it means, its returns fluctuate more than the market

Unit Trust measures of Performance
3 common measures: Sharpe Ratio, Treynor Ratio and Jenson Ratio can be used. Sharpe Ratio is one that is more commonly used for UTs.
Sharpe Ratio
The Sharpe ratio tells us whether the returns of a portfolio are due to smart investment decisions or a result of excess risk. This measurement is very useful because although a fund can reap higher returns, it is only a good investment if those higher returns do not come with too much additional risk.
The greater the Sharpe ratio, the better its risk-adjusted performance

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