The T. Rowe Price Capital Appreciation Fund (“PRWCX”) invests in equities, convertible stock, and corporate and government debt securities. The equities can be large, stable companies or smaller growth candidates, and the managers are authorized to invest up to 25% of the fund in foreign securities. Mutual funds are analyzed with risk metrics that measure volatility, market correlation and other factors that modern portfolio theory (MPT) has made prominent. According to beta, R-squared, standard deviation, capture ratios, alpha and the Sharpe ratio, PRWCX is able to achieve superior risk-adjusted returns relative to the benchmark, with limited volatility and systematic risk.
Beta is a measure of the volatility of a portfolio relative to the market as a whole, indicating systemic risk. The metric tracks correlation between returns of a security or fund and a broader underlying index. A value of 1 indicates perfect correlation, while higher values imply higher systematic risk due to increased volatility. PRWCX had a beta coefficient of 0.97 for the three years ended March 2016, with a five-year value of 1.02 and a 10-year value of 1.14. This indicates relatively low return volatility risk, with coefficients slightly above one over longer periods.
R-squared measures the correlation between a fund's returns and a benchmark. Funds with R-squared values approaching 100% have returns highly correlated to their benchmarks, so variations in fund value can be explained largely by market conditions. PRWCX had an R-squared statistic of 94.97% for the three years ended March 2016, with a five-year value of 89.06% and a 10-year value of 91.12%. R-square around and above 90% indicates that returns are heavily influenced by market conditions, and the metrics also suggest that PRWCX's beta holds explanatory value due to high correlation.
Standard deviation is a statistical measure of dispersion in historical fund returns, indicating the level of volatility exhibited by the fund. More volatile investments are generally considered riskier and require higher returns to offset additional risk. Standard deviation in returns for PRWCX was 7.43 percentage points over the three years ended March 2016, with a five-year value of 8.61 percentage points and a 10-year value of 11.83 percentage points. Corresponding values for the benchmark were 7.85 percentage points, 8.49 percentage points and 10.97 percentage points. PRWCX's standard deviation indicates only slightly higher risk than the benchmark, due to volatility.
Upside and downside capture ratios measure the extent to which a fund is reflecting directional market performance. They are calculated by dividing monthly fund return by market return, with upside capture being calculated only for months with positive appreciation and downside capture being calculated only for months in which losses are sustained. PRWCX had upside capture ratios of 122% over three years, 121% over five years and 119% over the 10 years ended March 2016, while downside capture ratios were 57% over three years, 75% over five years and 102% over 10 years. These capture ratios indicate the ideal combination of superior returns in bull markets and less severe losses in bear markets.
The Sharpe ratio is a measure of risk-adjusted return, calculated by dividing returns by standard deviation. Higher ratios indicate superior risk-reward history, with less of the appreciation being attained through volatility. In March 2016, PRWCX had Sharpe ratios of 1.46 over three years, 1.24 over five years and 0.65 over 10 years. The corresponding figures for Morningstar's Moderate Target Risk Total Returns index were 0.54, 0.61 and 0.44. For the Standard & Poor's 500 Total Return index, these values were 1.04, 0.95 and 0.45. Despite maintaining a similar risk profile to the benchmark, PRWCX was able to achieve superior returns.
Alpha is a representation of returns in excess expected values, based on beta relative to a benchmark index. This can be interpreted as the value added by a fund's manager or strategy, with higher values suggesting superior results. As of March 2016, PRWCX had a three-year alpha of 6.48, five-year alpha of 6.48 and 10-year alpha of 2.27. As the Sharpe ratio also suggests, alpha indicates that PRWCX's management is able to drive higher-than-expected returns.