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Aalto University School of Business Master's Theses are now in the Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Finance | Finance | 2016
Thesis number: 14756
Does the measure matter when evaluating mutual fund performance? Evidence from U.S.
Author: Kaukonen, Olli
Title: Does the measure matter when evaluating mutual fund performance? Evidence from U.S.
Year: 2016  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; sijoitusrahastot; arviointi; tuottavuus
Pages: 57
Key terms: risk-adjusted performance measure, mutual funds, Sharpe ratio, rank correlation coefficient, Spearman’s rho

The purpose of this thesis is to examine whether the risk-adjusted performance measures matter when evaluating mutual funds' performance. Furthermore, by using twelve different performance measures, my objective is to calculate rank correlations among measures. Finally, another purpose is to see what the impact of varying three different parameters on the main results is. These three parameters are the minimum acceptable level, the number of drawdowns and the significance level.


The data used to examine the rank correlations among different risk-adjusted performance measures is obtained from CRSP U.S. Mutual Fund Database. This thesis uses monthly return data on 4,682 U.S. mutual funds, ranging from January 2005 to December 2015. The sample contains 2,932 equity, 1,670 fixed income and 80 real estate mutual funds. The sample is free from survivorship bias. This thesis ranks mutual funds by using twelve different risk-adjusted performance measures. To calculate rank correlations among different measures, this thesis applies Spearman's rank correlation coefficient, also known as Spearman's rho.


The empirical results indicate that when evaluating equity and real estate funds, the Sharpe ratio seems to be adequate as it shows high rank correlation coefficients with other performance measures. Generally rank correlations are over 0.90 for performance measures with only one exception as Modified Sharpe ratio shows relatively low rank correlations when analysing these two asset classes. When analysing fixed income funds, the results are different as only a few measures are showing over 0.90 rank correlation with respect to other measures. Especially measures that are applying market return in their calculation show totally different results. These findings on fixed income funds may be due to fact that both market correlation and correlation among all mutual funds are significantly low, 0.43 and 0.36 respectively.

Furthermore, when analysing the impact of three different parameters on specific performance measures and their rank correlations with respect to the Sharpe ratio, this thesis states that they do not have significant effect on the main results and performance measure is not dependent on what parameters investors' choose to use.
Master's theses are stored at Learning Centre in Otaniemi.