It goes without saying that one of the best talents a fund manager can have is the ability to make great stock picks. If you are shopping around for a fund manager, you might check out their appraisal ratio.
What is it? Basically, RISK-ADJUSTED returns...not just returns. That is...a given fund manager spends 5 bucks on a lottery ticket and wins. It was a 1 in a billion chance to win a million bucks. Bad risk. But they won. They'd get a horrible score on the risk-adjusted return lens into which you're viewing their appraisal ratio, even though the 5 dollar "investment" did phenomenally well.
In a fund structure, the appraisal ratio calculates the amount of return of the manager’s stocks as compared to the benchmark over the specific risk of those choices. The higher the ratio, the better.
Related or Semi-related Video
Finance: What is Counterparty Risk?9 Views
Finance a la shmoop what is counterparty risk?
alright here's you the party and here's the guy you're contracting with to sell [Woman and man stood side by side]
18 tons of bricks or buy a line of credit for your flower shop or sell a
futures contract with the right to buy oil at 80 bucks a barrel for the next [Person signs contract]
two years so you're the party and he's the counterparty and the yin and yang of
the party and here's the risk yeah well the counterparty risk is just
that the person you contracted with doesn't live up to their end of the
bargain you pay them good money you sign a good contract all lawyered up and [Stack of money and contract appears]
stuff and then they split like totally split disappeared sea men choose the
bottom of the ocean maybe they went to Bora Bora
maybe they got facial surgery in the Philippines you know they do that now [George Clooney in a surgical bed]
well when that happens you will probably feel like crying and you should its your
counterparty you can cry if you want to come on that was a good reference people [Man singing]
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