VAR: Used In Evaluation Of Mutual Funds

The measurement of investment performance has always been the main concerned issue for managers and investors. In general, Sharpe ratio Treynor's measure and Jensen's measure are used to evaluate the performance of investment portfolio. That traditional tool can value the performance of investment portfolio in a certain extent, but they aslo have some limitations. Though Sharpe Ratio is the well-known method when under the hypothesis of normal distribution of return, but it will be bias when the return is non梟ormality. Besides, Sharpe Ratio uses the standard deviation for the risk evaluation. The standard deviation only measures the floating risks, but not the declining risk. Thus, we cannot acquire the real risk. So, this article proposes the Value at risk (VaR) method to replace the standard deviation as to correct the Sharpe Ratio's bias and then enhance the sensitivity when the return is not exact normality.Value-at-Risk (VaR) measures the worst expected loss under normal market conditions over a specific time interval at a given confidence level. It can accurately measure risk without requiring the hypothesis of normal distribution of return. Therefore, we use the VaR instead of the standard deviation to get the adjusted Sharpe Ratio V1; and use the benchmark return instead of the risk-free rate of interest to get the adjusted Sharpe Ratio V2; and use the Benchmark-Relative VaR instead ofthe standard deviation to get the adjusted Ratio V3. This article firstly tests the distribution of the return of the mutual funds, and then based on this tested result we analyze the relations between the traditional index and the index adjusted by VAR, and the effect of themWe find that all but one of the mutual funds tends to approach the normal distribution. But all of their kurtosis index and skewness index differ with the normal distribution. So, based on the distribution of return we use the model of historical data to evaluate the VaR of the mutual funds.We discover that there are some differences in the ranking between the traditional Sharpe Ratio and the V1 and V2. The reason that makes the different ranking is the inaccuracy of the normal distribution of the return. Therefore, their not asking for the hypothesis of normal distribution can make the exact evaluation for the mutual funds. Besides?V3 has great different from other indexes, it tends to give the higher estimate for the mutual funds which have closer relations with the benchmark portfolio.This article has such innovations as follows: First, it is a pioneer study to evaluate the mutual funds based on measures adjusted by VAR at Chinese Mainland, I have not found similar research paper published; Second, the study has used the advanced analytical methods such as K-S examination of normal distribution and Spearman analyse of correlated grade; Third, the study has used the advanced software with strong function such as SPSS and EXCEL that can do the complicated calculation rapidly and accurately.