DEFINITION of 'Batting Average'

An investment manager's "batting average" is a statistical technique used to measure a manager's ability to meet or beat an index. A batting average is calculated by dividing the number of days (or months, quarters, etc.) in which the manager beats or matches the index by the total number of days (or months, quarters, etc.) in the period of question and multiplying that factor by 100.

The higher the batting average, the better. The highest number possible average would be 100%, meaning the manager outperformed the benchmark every single period. In contrast, a batting average of 0%, means the manager never once outperform their benchmark. Often, a batting average of 50% is used as a minimum threshold for measuring investment success.

BREAKING DOWN 'Batting Average'

An investment manager who outperforms the market in 15 out of a possible 30 days would have a statistical batting average of 50. The longer the period taken in the sample size, the more statistically significant the measure becomes. Many analysts use this simple calculation in their broader assessments of individual investment managers.

The information ratio (IR) is a similar measure of success (or failure) of money managers. It, however, does not easily string together a series of success or failures, which are helpful when assessing final investment outcomes. The batting average overcomes this shortcoming by answering: Does an investment manager win or lose most investment bets?

The information ratio and the batting average are two commonly quoted measures of investment success, but these measures have shortcomings: The IR contains no information about higher moments, and the batting average contains only directional information.

Limitations of Batting Average

More specifically, the batting average suffers from two primary limitations. First, batting average focuses only on returns and does not take into consideration the level of risk taken by a manager in achieving returns. Second, batting average does not factor in the scale of any potential outperformance. A manager might outperform the benchmark by, say, 0.1% for ten months, but in the 11th month fall short of the benchmark by 3.50%. In such a case the batting average would be 90.90%, but the manager would have dramatically underperformed their benchmark — and now, investors are getting nervous.

RELATED TERMS
  1. Better Alternative Trading System ...

    The Better Alternative Trading System (BATS) is a U.S.-based ...
  2. Information Ratio - IR

    A ratio of portfolio returns above the returns of a benchmark ...
  3. Proof

    An impression of a print made before an edition to check the ...
  4. Average Up

    Average up is the process of buying additional shares in a stock ...
  5. Investment Management

    Investment management is a generic term that most commonly refers ...
  6. Active Management

    The use of a human element, such as a single manager, co-managers ...
Related Articles
  1. Investing

    BATS Up Nearly 20% Following Successful IPO

    The second time's the charm for BATS Global Markets Inc. (BATS), which priced 13.3 million shares at $19 per share Thursday, in the first major IPO of the year.
  2. Insurance

    Why BATS Killed Its IPO

    There have been several successful IPOs, however this isn't one of them.
  3. Investing

    ETF Wars: NYSE Under Siege

    The NYSE dominates 92% of the $2.3 trillion ETF market, but rivals are closing in
  4. Personal Finance

    Jump Start Your Financial Career With The BAT

    The BAT is quickly becoming known in the job market as a tool to provide a window into the minds of those seeking financial jobs.
  5. Investing

    China's BAT Stocks Have More Bite Than FANGs

    Baidu, Alibaba and Tencent are showing up their American rivals, at least in terms of stock returns.
  6. Investing

    BAT: High Demand for Glo No-Burn Tobacco in Japan

    As smoking rates decline, tobacco companies foresee a phase-out of their flagship product.
  7. Investing

    Tobacco Giants Push New ‘Alternative Products’

    As many quit cigarettes, firms such as BAT are creating new products 'across the harm spectrum.'
  8. Investing

    Goldman Sachs' Profits Beat, Revenues Plunge

    Analysts expected bad news ahead of Goldman's first-quarter earnings, reported before market open Tuesday. They were half right.
  9. Investing

    A Look Inside the iShares International Select Dividend ETF (IDV, AZN)

    The IDV, which has $2.75 trillion in net assets, is designed to track the results of high dividend paying equities in non-U.S. developed markets.
  10. Investing

    Active Management: Is It Working for You?

    There are guidelines when comparing an actively managed investment strategy with a benchmark.
RELATED FAQS
  1. What does a low information ratio tell an investor about a mutual fund?

    Understand what the information ratio is used to measure. Learn how an investor uses the information ratio to make investment ... Read Answer >>
  2. What is the difference between a sharpe ratio and an information ratio?

    Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >>
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center