RISK-ADJUSTED PERFORMANCE OF MUTUAL FUNDS

Mutual funds are now the preferred way for individual investors and ma ny institutions to participate in the capital markets, and their popul arity has increased demand for evaluations of fund performance. Many b usiness publications now rank mutual Amds according to their performan ce, and information sen ices exist specifically for this purpose. Ther e is no general agreement, however, about how best to measure and comp are fund performance and on what information funds should disclose to investors. Risk and performance measurement is an active area for acad emic research and continues to be of vital interest to investors who n eed to make informed decisions and to mutual fund managers whose compe nsation is tied to performance. This article describes a number of per formance measures. Their common feature is that they all measure funds ' returns relative to risk. However, they differ in how they define an d measure risk and, consequently, in how they define risk-adjusted per formance. The author also compares rankings of a large sample of funds using two popular measures. She finds a surprisingly good agreement b etween the two measures for both stock and bond funds during the three -year period between 1995 and 1997.