Study On Performance Measurement Methods Of Security Fund Based On Lower Partial Moments

Fund is the basic tool for investor to participate the security investment. Fund performance measurement has both theoretical and practical concerns. Three classic performance measurement indices which were born in Twenty century sixty ages enterd the study on risk adjustment about the fund's return. With the development of people's concern about risk, it is becoming the mainstream to use the more sound risk measurement tools to adjust fund's performances. Three classic performance measurement indices use Mean-Variance framework as their theoretical basis. However, performance measurement indices based on the Variance as its risk measurement view the upside deviation and the downside deviation as the same, which violate the investor's attitude towards risk in the real world. So these three classic indices embody the pitfall in the theory. During Twenty century ninety ages VaR model gained its prevalence in the financial circle and overcomed the pitfalls below above, but VaR could not measure extreme risk. In order to solve these problems below above, this paper based on the other people's study, introduces the downside risk measurement tool -Lower Partial Moments(LPM) to measure the fund's risk, and conducts a new performance measurement index --RAROC(LPM). This index uses the downside risk measurement method, improves the inner pitfall on the classic performance measurement indices, at the same time offsets the problem about VaR which could not measure extreme risk.It is of vital importance to check out a new index in practice for evaluating this index. A nice performance index would not only open up the match between real risk and return, but also would forecast the fund's future performance. This paper designs the correlation test and consistency test about performance measurement index, testing on the correlation between the new index and the old ones, also the indices' prediction ability in the two terms. The empirical result shows that RAROC(LPM) has distinct correlation with RAROC(VaR) as well as Treynor index. Meanwhile in the short term, compared with RAROC (VaR), RAROC(LPM) index has more obvious prediction effect. RAROC(LPM) proposed by this paper, compared with others, has more theoretical value and practical advantage, and could supply the sound information for investor. Furthermore, based on. the present index, this paper uses EVA index for reference and creatively conducts a new index—FVA index (Fund Value Adding index). At the same time, this paper also makes use of FVA index to make the empirical analysis on the closed and opened funds.