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4 things to note for mutual fund investors in volatile markets

Volatile Markets : 4 Things To Note For Mutual Fund Investors

Mutual Fund Investors Should Not Do These 4 Things in Current Volatile Markets Scenario

Introduction

Indian stock market is currently going through a correction phase. In this article, we will discuss the 4 things to note for mutual fund investors in current volatile markets in order to generate higher returns.

Volatile Markets : 4 Things To Note For Mutual Fund Investors

Lets discuss the which are those 4 things to note for mutual fund investors in current volatile markets.

4 Things To Note For Mutual Fund Investors in Volatile Markets
Volatile Markets : 4 Things To Note For Mutual Fund Investors

1.Do Not Focus Too Much on Current Market Scenario

  • Indian stock market has entered a correction since last couple of weeks due to lack of measures in the budget 2019 to stimulate the economy. Also, taxation on the super rich has adversely affected the foreign investments and soured the market mood.
  • The Indian equity markets is going through a slow down due to both internal and external factors. Following are some of the factors/reasons behind the slowdown.
    1. Internal factors : NBFC crisis, Slowdown in auto sales, consumption and manufacturing
    2. External factors : US China trade, Brexit, uncertainty in crude oil prices, overall slowdown in global economic activity
  • Thus, you should not take your investment decisions in this kind of current scenario in the stock market. You should always remind yourself one important thing that you are investing in the stocks to achieve your long-term financial goals.
  • So, you should not focus on or worry too much for the short-term volatility and sentiment in the current market scenario.
BSE Sensex Falling Trend  (from 15th July 2019 to 9th August 2019)
BSE Sensex Falling Trend (from 15th July 2019 to 9th August 2019)
Source : www.bseindia.com

2.Do Not Stop Your SIPs

  • SIP route helps you average your purchase price and helps you with better returns with relatively lower risks. This rule applies for all Equity SIPs.
  • When market sentiments start becoming a bit panic or unshielded, most of the investors start worrying about their regular investments SIPs and raising a question on continuing their SIP investments. But, stopping your SIPs would not be a smart move.
  • The investors who would continue with the SIP investments during the market slump would gain by buying more units of the same fund. It helps them to buy stocks at a discount. Hence those investors who stick to their SIP investments would gain significantly through a lower average price of holdings.
  • So, you should not stop your SIPs in current market scenario in order to get the advantage of stock purchases at the discount.

3.Do Not Change Your Original Investment Allocation

  • Most of the investors tend to change their investments in times of market volatility. 
  • The BSE Sensex is trading lower compared to the 1-year-ago and 3-months-ago levels, while it is flat compared to its level 6 months ago.
    • In the past one year, small cap and mid cap funds have offered negative returns of almost -16% and -12%, respectively.
    • Thus, many investors tend switch to large cap funds to be safer if mid cap and small cap funds are not showing the expected performance. But that is not a right move.
  • Keep on altering the original investment allocation would affect your investments and can hamper your long-term returns.
  • Don’t think about changing allocations, moving to safer schemes etc. The best thing to do is to do nothing, in such uncertain, volatile market conditions. So, Stick to your asset allocation.
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4. Don’t Be Too Excited

  • Many smart investors make strategic allocations in a falling market to maximize wealth. Such tactical allocations will definitely helps you to buy more in a sluggish market.
  • An aggressive investor is prepared to take higher risk in anticipation of higher returns. Many times, you tend to go overloaded in the sentiment of becoming too excited in falling markets.
  • However, you should allocate your surplus funds to make strategic investments only after thinking it through. Allocate only the part you do not need in a short term.
  • Don’t be too excited for profit booking by going overloaded in sluggish markets. The market may not move as per your expectation and you might incur losses in the process.
Mutual Fund

10 Most Favourite Large Cap Stocks of Mutual Funds

Top 10 Large Cap Stocks

Introduction

In this article, we are going to see the 10 Most Favourite Large Cap Stocks of Mutual Funds. Maximum numbers of mutual fund schemes have invested in them. An online poll
was conducted for choosing a stock in which the maximum numbers of mutual fund schemes have invested in them. Here, we are not talking about the amount invested in those large cap stocks but the number of mutual fund schemes, invested in them.

The options to choose from were HDFC Bank, ICICI Bank, Infosys, Reliance Industries, Axis Bank and such. Maximum people choose HDFC bank, as the stock in which maximum number of stocks would have invested in it. This would have been current if it were February 2018 right now, but its not. The statistics has changed completely in February 2019. The interesting that came out from the poll was, the large cap stocks which got the least votes was in fact the stock in which maximum mutual fund schemes have invested.

We listed of 10 Large Cap stocks which are held by maximum number of mutual fund schemes. Out of these 10, 5 stocks belonged to the banking sector. And out of this 5, 4 are private sector banks and just one is a PSU. And 1 company each from IT, infrastructure, auto, FMCG and diversified sectors (many business areas of 1 company).

10 Most Favourite Large Cap Stocks

10 Most Favourite Large Cap Stocks of Mutual Funds
10 Most Favourite Large Cap Stocks of Mutual Funds

1. ICICI Bank

  • ICICI Bank Limited is an Indian multinational banking and financial services company headquartered in Mumbai, Maharashtra. As of 2018, ICICI Bank is the second largest bank in India in terms of assets and market capitalisation. ICICI bank has a corporate lending oriented business.
  • This was would be a surprising stock for many people. 10 schemes have additionally added this stock to their portfolio.

2. HDFC Bank

  • An Indian banking and financial services company, HDFC Bank Limited has its headquarter in Mumbai, Maharashtra. HDFC Bank is India’s largest private sector lender by assets. It focuses more on retail banking.
  • There has been a fall in the number mutual fund schemes which have invested in this stock (YoY). The reason is the mutual funds are increasing allocations to corporate banks and HDFC is a retail bank.

3. SBI

  • The State Bank of India is an Indian multinational, public Sector banking and financial services statutory body. It is a government corporation statutory body having headquarter in Mumbai, Maharashtra.
  • This another corporate banks whose balance sheet now looks stable and the NPA’s are under control.

4. Axis Bank

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  • Axis Bank is the third-largest of the private-sector banks in India offering a comprehensive suite of financial products. The bank has its head office in Mumbai, Maharashtra.
  • Axis bank too is a corporate bank. Axis bank has gone through some major transformation. Mr. Amitabh Chaudhary, former CEO of HDFC Life, has taken the charge as the CEO of Axis bank from 1st January 2019. He, as the new CEO, has made a lot of changes in the functioning and performance of the bank. This has been taken very positively by the DII’s and FII’s. The stocks of Axis bank have had a rally of almost 40% in the last 1 year. The reason is the same that the management has changed and a new perspective has been developed in Axis Bank.
  • The rise in the numbers of mutual fund schemes invested is the highest in Axis bank.

5. Infosys

  • Infosys Limited is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It has its headquarters in Bengaluru, Karnataka, India.
  • Last year was very good for the IT companies because of the rupee depreciation, their revenues in terms of rupee had been improved healthily. Last year there weren’t also any issues related to US economy.

6. ITC

  • ITC is an Indian cigarette company which is headquartered in Kolkata. Its five diversified businesses are Fast-Moving Consumer Goods, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business and Information Technology.
  • ITC is a super liquid stock, and which is why mutual funds might have invested in it, as if and when they face liquidity or redemption pressure, they can immediately sell this stock.

7. L&T

  • Larsen & Toubro Limited, commonly known as L&T, is one of the largest Indian multi-national firms and leading construction company in India headquartered in Mumbai, Maharashtra, India.
  • The results of L&T, of last 12 months, are very good. They have performed in both YoY as well as QoQ basis.
  • There are also news of L&T acquiring Mind Tree where they have already bought some stake in Mind Tree and have now given an open offer. There have been many developments in that hostile takeover attempted of Mind Tree by L&T.
  • But the increased investments are because of their core infrastructure business. L&T has a very strong project pipeline.

8. Kotak Mahindra Bank

  • Kotak Mahindra Bank is an Indian private sector bank headquartered in Mumbai, Maharashtra, India. In February 2003, Reserve Bank of India issued the licence to Kotak Mahindra Finance Ltd., the group’s flagship company, to carry on banking business.
  • Kotak Mahindra is another retail oriented bank, like HDFC bank. It is a very well managed bank.
  • There are no problems with NPA’s of the bank The only bank with the bank is the notice given by RBI to the bank to reduce the promoter holding.

9. Reliance Industries

  • An Indian conglomerate holding company, Reliance Industries Limited has headquarter in Mumbai, Maharashtra, India. Reliance Industries is the largest company in India as per market capitalization.
  • Reliance industries has a very diversified business portfolio. It owns businesses across India engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications. The company has very rich cash flow.

10. Maruti Suzuki

  • Maruti Suzuki India Limited, formerly known as Maruti Udyog Limited, is an automobile manufacturer in India. It is a 56.21% owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor Corporation. Currently  it has a market share of around 51% of the Indian passenger car market.
  • Here, the number of mutual fund schemes have gone down. There is no problem with their business model. The reason behind this can be the slowdown in the auto industry. The last 4 years have been very good for the auto companies, but the next 6-8 quarters can continue to be sluggish.

summary

  1. Markets are expecting that the corporate banks are going to perform well this year, and that is why they have gotten higher allocation than the retail oriented banks.
  2. This year some issues can be seen building in the US economy. There are rumours of USA going for a recession. The 10-year G-sec yields have gone down from 3.18% to 2.48%. the US economy may not grow as per the expectations as there are signs of a slowdown. Thus, there are chances that the IT companies may not have a similar or better year again.
  3. Almost all of the above can looked at as a long term investment option.

Notes: –

  • The numbers that are used are approximate and have been rounded for presentation purposes.
  • We are not in any way saying that these are bad companies, or the stocks of these companies are bad.
  • We are also not suggesting anyone to immediately go and buy these stocks or invest in the stock markets.
  • Only an analysis has been presented here. No judgments or final statements are being made here.
What is Systematic Withdrawal Plan

What is Systematic Withdrawal Plan (SWP)

Systematic Withdrawal Plan : Definition & Example

introduction

In our earlier article, what is SIP? we have seen that in SIP, you look at accumulating a corpus by making regular investments into a mutual fund. Whereas in Systematic Withdrawal Plan, you regularly withdraw a fixed amount of money from your fund. Your fund’s value and number of units will reduce to the extent of each withdrawal. The amount to be withdrawn and the frequency— monthly, quarterly, half yearly, or annually—are set by the investor.

definition : what is Systematic Withdrawal Plan?

Systematic Withdrawal Plan
Systematic Withdrawal Plan
  • Systematic Withdrawal Plan or SWP allows an investor to withdraw from his mutual fund scheme every month on an already set date. SWP is used to redeem your investment from a mutual fund scheme in a phased manner. SWP enables you to withdraw money in installments which is not possible in of a case lump sum withdrawals .
  • It can be viewed as an opposite of SIP. In SIP, we channelize our bank account savings into the preferred mutual fund scheme. Whereas in SWP, we channelize our investments from the scheme to the savings bank account. It is one of the strategies to deal with market fluctuations.
  • With SWP, we can customize the cash flow as per our requirement. We can choose to either withdraw just the capital gains on our investment or a fixed amount. This way we will not only have our money still invested in the scheme, but we will also be able to access regular income and returns. 
  • SWP is a method where you are assured of getting a fixed amount at your pre-determined frequency. The problem with other regular money options like a monthly income plans, which pay dividends, is that the amount and the frequency of the pay-outs is not fixed.
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how does SWP work?

  • It is important to note that an SWP is not the same as opening a fixed deposit account in a bank where we receive monthly interests. When we choose a Systematic Withdrawal Plan, it affects our mutual fund account as well.
  • With a fixed deposit, the corpus value is not impacted when we withdraw the interest. But in the case of a systematic withdrawal plan in mutual fund schemes, the value of our fund is reduced by the number of units we withdraw.
  • When you have a systematic withdrawal plan in place, shares of your investment are liquidated or sold as necessary to provide the stated amount of your withdrawal. If you own several mutual funds or have several sub-accounts inside a variable annuity, shares are sold proportionately to what you own. This helps keeps your overall asset allocation in balance.
  • Instead of using several funds, you can use one balanced fund and take systematic withdrawals from that. Alternatively, you can use a retirement income fund that is managed specifically for the purpose of sending you monthly income.

example : SWP

Nilesh has 5000 units in a Mutual fund scheme and he wants to withdraw ₹4000 every month as SWP.

  1. On January 1, the NAV of the scheme is ₹10 hence 4000/10=400units will be redeemed in first month giving him ₹4000.
  2. At this stage, remaining units become 5000-400=4600.
  3. On February 1, let us say NAV of the scheme became ₹20, hence 4000/20=200 units will be redeemed in second month to him giving ₹4000.
  4. At this stage, remaining units become 4600-200=4400.
  5. This process can go on till all the units get exhausted.

Key Features of Systematic Withdrawal Plan

  1. Withdrawals in SWP are treated as normal withdrawals. So, exit loads of the fund should be checked before starting an SWP.
  2. Since each withdrawal is essentially a sale of units, remember to check your tax implications on the redemption. You should start SWP only after remaining invested for at least a year in Equity funds and 3 years in Debt funds to reduce tax implications to the lowest.
  3. You cannot run a SIP and an SWP in the same fund.
  4. The number of withdrawals you can make from your fund corpus depends on the amount of withdrawal, size of your corpus and rate of the return of your fund.

when SWP Should be used?

  • When you want a fixed periodic income in your retirement years, when you don’t have any other income.
  • You are giving a fixed monthly expense to your child in hostel, out of his Education corpus.
  • You are planning for sabbatical leave and want to take care of you expenses from accumulated investments.

Who can put to use swp?

It is preferred by the person who has retired. It will help him/her to get monthly income after the retirement with minimum tax impact and maintain regular cash flow.

mutual fund selection

How to Select a Mutual Fund?

Choosing The Best Mutual Fund

Introduction

Mutual Fund is a good investment instrument to meet one’s financial goals with their ease of investing and professional management. However, mutual funds vary in terms of their objectives, investment horizon, AUM, charges and past performances.
Selecting a mutual fund for investing is a very important step. It is difficult to figure out which fund will do well in the future and give you returns that beat industry peers. Understanding on how to select a mutual fund can be difficult task given the number of schemes in the market. However, if you follow a few basics while choosing the fund, chances are you might end up getting decent returns on your investments.

Having an investment goal

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  • Selecting a mutual fund for investing is not only an important but also a crucial step. However, it is the second step and not the first one. The most important and the first step for any investment is to have an investment goal. A fantastic fund selection without having an investment objective is useless. One should know the reason for the investment and the time horizon (how long one can be in the investment) before making the first investment.
  • If you are looking for a longer term investment, which means you are looking to be invested for at least 8 to 10 years. Thus, It indicates you are looking to invest in equity mutual funds.
  • Asset Allocation : Your focus – Investment goal & time horizon, will lead you to the correct asset allocation. Asset allocation is a very important factor which will decide how much money you are going to put into an equity fund.
  • Once you have determined your asset allocation, the next step is- how to choose the right mutual fund scheme to invest in?
  • Therefore, selecting the right equity fund is important. Analyzing qualitative and quantitative parameters can help you pick the right fund. In this article we discuss steps involved to do the same.

picking right equity fund category

Picking the right fund category is important before you turn towards qualitative and quantitative parameters. Equity oriented hybrid funds are a good choice to achieve goals which are more 3-5 years away and pure equity funds for goals more than 5 years away.

  • Within pure equity funds there are various types:
Types of Equity Funds
Types of Equity Funds

Above are ideal investment vehicles to achieve goals with said duration.

  • Other aspects that impacts the category of fund you ultimately pick is, your financial position and your risk profile.

i. Financial position:

You can achieve the same goal by selecting any of the categories defined above, but with each category the amount required to be invested will vary. Large cap funds would require a higher investment amount than mid cap funds to achieve the same goal. So, you could go for any category if have the financial capacity to fund the amount. But if you don’t have the capacity, you will have to a pick higher risk category to achieve your goal.

ii. Risk Profile:

You may not be very comfortable with higher risk involved with investing into small cap funds, but can have good night’s sleep with stable large cap funds. So, based on this comfort level of yours, you could select a lower risk category, but remember the amount to be invested will be higher.

So, select an equity fund category based on the duration of investment, your financial position and your risk profile.

choosing the right scheme

There are thousands of schemes to choose from. Once you have finalized the fund type, you should consider following factors to finalize which scheme suits you the most:

How to Select A Mutual Fund?
How to Select A Mutual Fund?

1. fund house pedigree :

  • When you are going to invest in a mutual fund, you are trusting the fund house to manage your money. This is why the pedigree of the fund is important. Decisions taken by the fund house and the fund manager may have a direct impact on your investment’s performance and the realisation of your financial goals.
  • Hence, before selecting a scheme, it is important to do a check on the fund house, history of existence, overall long-term performance, their compliance record etc.
  • This criterion will help you remove few fund house schemes from further selection.

2. historical performance :

  • The most important criterion for selection of the scheme. You should choose the scheme which has a very good long-term record both against benchmark and peers.
  • It is true that historical performance is no guarantee of future performance, but it gives a good pointer. We recommend you go for funds which have consistently outperformed their benchmark index and peers over medium-longer terms (3, 5 and 10 years).
  • Equity mutual funds are conducive for long term investments only. Thus, the focus should be on long term performance than a weekly, monthly or quarterly performance. You can find these details in mutual fund factsheets.

3. Fund manager :

The credit for outperformance or underperformance of a mutual fund scheme lies with the fund manager (and his research team). You may not want to invest in a scheme with a new Fund manager. With most of the fund houses following strict investment process and guidelines, new fund managers mostly cannot create too much flutter and therefore you should keenly observe the performance before taking any investment or redemption decision. So, while selecting the scheme, you should look for the following info:

  • If the fund manager is a new recruit, how has been his/her performance with past schemes?
  • How are the other schemes performing which are managed by this fund manager?
  • How long the current Fund Manager is working with the scheme and how has been the performance during his/her tenure?

4. ket ratios :

You and your advisor should also consider few ratios before selecting an Equity Fund scheme:

  • Beta – Measures volatility. A beta of more than 1 (say 1.25) means that the fund is more volatile (25% in case of fund with Beta = 1.25) than the market. A lower beta indicates that the fund is more stable than the index
  • Alpha – Measure of how much the fund has outperformed its predicted return (Beta dependent). Look for higher alpha.

5. Asset Under Management :

Net assets of any scheme gives a fair idea of the confidence level of investors in the mutual fund scheme. Fund houses deploy their best fund managers for mutual fund schemes with high AUM. Therefore, this could be used as rejection criterion. You should reject the schemes with very low AUM as their volatility, expenses and risk profile could be higher.

6. expense ratio :

You should avoid schemes with very high Expense ratio. You should choose a scheme with average or below average expense ratio. Most of the established fund schemes will have lower expense ratio. Average Expense ratio of Equity funds (based on type) is between 1.8-2.2%

7. exit load :

There are few funds which charge very high Exit load as high as 3%. Though Equity fund investments are for long term but still you should avoid very high exit load funds as it kills your liquidity and ability to switch out in case of non-performance.

8. fund ratings :

We have provided unique ratings to each and every equity fund on our portal. You can refer to their ratings before finalizing the scheme to invest. Or you can even refer the ratings provided by third party agencies such as Value Research, Morningstar, Crisil etc. But, don’t over depend on these ratings as they can be quite confusing as everyone has their own way of ranking mutual funds. But good ratings on your final shortlist or shortlist given by your advisor are a good confidence booster.

What is Treynor Ratio

What is Treynor Ratio?

Definition of Treynor Ratio and comparison with Sharpe Ratio

introduction

The Treynor Ratio, also known as Rewards-to-Volatility Ratio, is a performance metric to determine how much excess return is generated for each unit of the risk taken by a portfolio. In other word, it tries to measure how well an investment has compensated its investors at its given level of risk.

Definition : Treynor ratio

  1. Treynor Ratio was developed by Jack Treynor, an American economist who was one of the inventors of the Capital Asset Pricing Model (CAPM).
  2. The ratio measures the excess return generated per unit of risk taken by the portfolio. Excess return here means the return earned above the return that could have been earned in a risk-free investment.
  3. There is no true risk-free investment. So Treasury Bills are often used to represent the risk-free return in the ratio. Risk in the ratio refers to the systematic risk which is measured by the portfolio’s Beta. Beta measures the tendency of a portfolio’s return to change in response to changes in return for the overall market.
  4. It is a risk assessment tool that calculates the value of an investment adjusted risk by measuring the volatility in the market. In other words, it is a financial equation that investors use to calculate the risk of certain investments taking into account the volatility of the market.
  5. It aims to adjust all the investment for the market volatility and the risk associated with it, in order to compare investments based on their performance instead of market factors.
Treynor Ratio

formula

  • Treynor Ratio = [Average Portfolio Return – Average Risk Free Rate] / Beta of the Portfolio
  • TR = [ Rp – Rf ] / B

Where,

  • TR = Rp = Return of the Portfolio
  • Rf = Risk-Free Rate of Return
  • B = Beta of the Portfolio
  • Rp represents the actual return of the stock or investment. Rf represents the rate that a risk free investment like Treasure bills is willing to pay. B represents the volatility of the investment portfolio in comparison to the market as a whole.

What does the treynor ratio tell?

  1. The Treynor ratio is a risk-adjusted measurement of return based on systematic risk. It indicates how much return an investment, such as a portfolio of stocks, a mutual fund, or exchange-traded fund, earned for the amount of risk the investment assumed.
  2. The higher the Treynor ratio of a portfolio the better is its performance. So when analyzing multiple portfolios, the use of it as a metric will help us to successfully analyze them and find the best one among them.
  3. In a portfolio with a negative beta, however, the ratio result is not meaningful. A higher ratio result is more desirable. It means that a given portfolio is likely a more suitable investment.
  4. Since, the ratio is based on the historical data, it does not necessarily indicate future performance. Therefore, one should not solely rely upon it for investing decisions.

Treynor ratio v/s sharpe ratio

  • Sharpe Ratio is a metric, similar to the Treynor ratio, used to analyze the performance of different portfolios, taking into account the risk involved. The equation for calculating Treynor Ratio is similar to the method of Sharpe Ratio for assessing the risk and volatility in the market with one exception.
  • The main difference between the Sharpe ratio and the Treynor ratio is that the Treynor Ratio uses the systematic risk, while the Sharpe ratio uses the total risk or the standard deviation.
  • The Sharpe ratio metric is useful for all portfolios, while the Treynor ratio can only be applied to well-diversified portfolios. 
  • The Sharpe ratio reveals how well a portfolio performs in comparison to a riskless investment. It first calculates either the expected or the real return on investment for an investment portfolio (or even a personal equity investment), subtracts the riskless investment’s return on investment, and then divides that result by the standard deviation of the investment portfolio.
  • Both the methodologies work for determining a “better performing portfolio” on considering the risk, making it more suitable than raw performance analysis.

limitations

  1. The main drawback of the Treynor ratio is that it is backward-looking. It relies on using a specific benchmark to measure beta. A stock with a beta of 2 might not essentially have thrice the volatility of the market forever. 
  2. Treynor ratio gives importance to how the portfolios behaved in past. In reality, the investments or portfolios are ever changing and we can’t analyze one with just past knowledge as the portfolios may behave differently in future due to change in market trends and other changes.
  3. For example, if a stock has been giving the firm a 10% rate of return for the past several years, it is not guaranteed that it will go on doing the same thing in the years to follow. The rate of return can go either way, which the Treynor ratio don’t consider.
  4. Treynor ratio can be effectively used for analyzing multiple portfolios only if it is given that they are a subset of a larger portfolio. In cases where the portfolios have a varying total risk and similar systematic risks, they will be ranked the same, making the ratio useless in performance analysis of such portfolios.
  5. There is an issue with the utilization of beta as a measure of risk. Several accomplished investors would say that beta can’t give you a clear picture of involved risk. Also, aacording to them the volatility of an investment isn’t the true measure of risk.

summary

  • The Treynor ratio is a risk/return measure that allows investors to adjust a portfolio’s returns for systematic risk.
  • The higher the Treynor ratio of a portfolio the better is its performance. A higher ratio result means a portfolio is a more suitable investment.
  • The Sharpe ratio is similar to the Treynor ratio. But the Sharpe ratio uses a portfolio’s standard deviation to adjust the portfolio returns, while the latter one uses portfolio’s Beta for the same.

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