[R-SIG-Finance] making sense of 100's of funds
Brian G. Peterson
brian at braverock.com
Sat Aug 18 16:04:57 CEST 2007
paul sorenson wrote:
> I ran a pairs plot on the daily fund returns as well as calculating the
> correlation coefficient (Pearson).
> The pairs plot is reproduced at http://www.metrak.com/tmp/exch09.png and
> unless I am missing something, some of these "look" significant whereas
> some don't.
The pairs plot will certainly show you funds that closely track the
index. A quick check of cor() (or the Pearson correlation coefficient)
and CAPM.alpha() will do the same. A pairs plot (and to a lesser extent
correlation) won't show you anything about systematic out-performance or
under-performance, while alpha is a good indicator if the benchmark you
choose is indicative of the investment universe of the fund. Another
good indicator is Sortino's Upside Potential Ratio, especially if you
choose the benchmark index standard deviation as your MAR.
CAPM alpha will not be a good indicator if you choose an index that is
different from the investment style of the fund. For example, using a
SP200 index with a fixed income fund wouldn't make any sense.
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