StateTrust measures an investment manager’s returns based on risk adjusted criteria. Four statistical terms are used to calculate a manager’s risk-adjusted return:
- Standard deviation: Return variation versus median return.
- Alpha: Calculates the portion of a manager’s investment return that is not correlated with the market.
- Beta: Responsiveness to the market return (direct correlation with the market).
- Sharpe ratio: Calculates return (adjusted for the risk taken) against a benchmark.
Performance Among Peers
Since asset diversification* is a critical element in reducing risk and attaining investment objectives, investment management selection will include managers that represent different investment styles and asset classes. In order to rate these managers, it is critical to research peer/style groups. We can then determine a manager’s effectiveness by utilizing benchmarks and comparing the manager’s results to others in his/her peer/style group.
Performance in Rising/Falling Markets
We review money managers’ quarterly returns and assess their overall performance in both rising/falling markets. While some managers employ tecniques that enhance returns in rising markets, those same tecniques can also result in lower performance with falling markets. Thus, it is important to assess overall performance and to adjust your portfolio mix to reduce risks in the case of a falling market.
* Diversification does not guarantee a profit or ensure against loss.
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