1. Perspectives on the Risk-Return Relationship
  2. Understanding Mutual Fund Returns
  3. Fund I-Q No.2: Favorable Risk-Return Profile
  4. Scoring Risk-Return Data

By Richard Loth (Contact | Biography)

This is the entry we need to complete in the Fund Investment Quality Scorecard for an analysis of a fund's risk-return profile:



Obviously, the greater the positive risk-return spread, the more favorable the rating. Negative spreads fall into the "other" classification and are not indicative of investment quality in the Fund I-Q Scorecard.

It is important to understand that all mutual fund investment research services use similar risk-return qualifiers. These indicators measure a fund's risk-return relationship within the context of its investment category (large cap value, small cap growth, etc.) and not the whole mutual fund universe. Each fund category has differing investment characteristics, making a universal risk-return qualification impossible - and inappropriate. With mutual fund risk-return classifications, as well as other types of investments, it is simply a necessity to make "apples to apples" comparisons.

Morningstar's well-known star ratings reflect historical risk-adjusted performance and are extremely popular with investors shopping for mutual funds. However, while helpful in this process, even Morningstar cautions the investing public that "the star rating is a useful tool, but it's no substitute for doing your homework. Investing is much too complex for any single measure to sum up the entire merit of a security."

Therefore, serious fund investors should embrace the use of the Fund Investment-Quality Scorecard in making fund investment decisions. While this approach does require a bit of "homework," it will allow for a solid, thorough treatment of mutual fund analysis.

Return to the Main Menu.
Proceed to the next chapter on Fund Size and Performance.


Related Articles
  1. Investing

    Measuring a Fund's Risk and Return

    Learn the importance of the risk-return relationship in selecting a mutual fund.
  2. Investing

    A Fund's Investment Objective

    Learn to evaluate a fund's investment objective, or "style".
  3. Investing

    What You Need to Know About Mutual Funds

    Mutual funds are a good investment opportunity, but investors should know how they operate.
  4. Financial Advisor

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  5. Small Business

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  6. Investing

    Scoring Fund Investment Quality

    Learn some background on mutual funds and what factors can be used to assess their investment quality.
Frequently Asked Questions
  1. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ...
  3. Which mutual funds made money in 2008?

    Read about the only mutual fund that turned a profit in 2008. Learn about risk-averse investment strategies and the financial ...
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center