The Volatility Of Equity Funds Of Funds Research And Benefits

Funds of funds have been developing fast round the world as they showed upsince the1990s, esp. in America as a popular way of investment. Currently, relativepolicies will be open for mutual fund companies to release funds of funds in China butdomestic scholars haven’t research it in large size. This paper aims to make intensiveand systematic study on the construction and performance assessment of equity fundsof funds by combining the portfolio theory and capital asset pricing model.Firstly, the portfolio theory and capital asset pricing model are introduced as thetheoretical basis and then are applied in the analysis of the value of equity funds offunds in diminishing the volatility. As for equtiy funds of funds, the return rates varyconsiderably during a certain period while the time-series volatility of a single fund isalso high. While the equity funds of funds are collected, the portfolio exerts limitedinfluence on lowering the time-series volatility. However, dispersion of fund could begreatly reduced while the returns are not decreased, which is of main significance forsetting up equity fund portfolio.Secondly, this study discusses the construction method of funds of funds indetails, including selection of underlying funds, numbers of underlying funds andweighting configuration, etc.. Generally speaking, the growth rate of net value is notcontinuous. However, as the funds are ranked by the performance, the long-termwell-performed funds tend to excel others in the following year. And for the volatility,it is generally continuous. Therefore, the selection standard of underlying funds couldbe based on the long-term net value performance and volatility. In terms of thenumber of underlying funds, the best portfolio returns, risks, skewness, kurtosis andreturn confidence, etc. should be taken into consideration. The result shows that, asthe number of underlying fund portfolio increases, several favorable factors show up:lower risks, higher return confidence and diminishing marginal effects while changingof return skewness is unfavorable, etc.. data shows that20-or so underlying funds of aportfolio of the same category is appropriate. As far as weighting configuration isconcerned, the ‘best’ configuration is deduced by applying M-V model. However,historic data is not equivalent to future data, esp. when the fund number is too small inthe portfolio, this approach generally proves to be a failure. To be realistic,equal-weight or net-value weighting methods are more suitable and practical. Thirdly, this essay studies the performance assessment method and performanceof equity funds of funds. As for the performance standard of funds of funds, this papermakes fund index rather than stock index as the performance standard based on thestandards including RegressionR2, β coefficient and tracking error, etc.. Then themodel of positive skewness of the return rate of the underlying funds in the portfoliois raised and accordingly, it explaines that the equity fund portfolio could bring steadysurplus return among average performance of the equity fund. Two original fundportfolio are taken as an example to verify the model.Besides, the essay also covers the area of double dipping of fund portfolio,investment consultants and internal investment behavior.Lastly, the development of funds of funds in China is analyzed and prospected bycomparing them with the developing experience of overseas fund portfolio and thepast status of fund portfolio in China.