In: Finance
Suppose you observe the investment performance of 500 portfolio managers for ten years and rank them by investment returns during each year. After ten years, you find that 10 of the funds have investment returns that place the fund in the top half of the sample in each and every year of your sample. Such consistency of performance indicates to you that these must be the funds whose managers are in fact, skilled, and you invest your money in these funds. Is your conclusion warranted?
if I see that there is a consistency of the performance of manager in a respect to index and they are consistently outperforming the index, it'll mean that these managers are beating the rate of return of index to a large extent but it is not all about the rate of return and it is also about the risk measures taken in order to beat the rate of return so I will be able to not just calculate the Sharpe ratio but I will also take the respective risk which has been taken in order to earn the rate of return so I will be adjusting the rate of return which has been taken in order to maximize rate of return and hence I will only conclude after I have found out the risk weighted rate of return rather than just beating the index rate of return as it is not about just performing exceeding on the return front but I would be also considering the total assets under the management and the total risk which has been taken by the manager in order to earn the rate of return.
I will not be investing into such funds by just looking at the rate of return and I will be rather looking at the overall rate of return on the risk adjusted front and the total assets under management by the company so I will be deciding by looking at the complete picture rather than just looking at the outperformance on the front of excess rate of return made in comparison to the market index.