Mutual Fund Performance Evaluation Dashboard
Evaluating a mutual fund manager's performance requires going beyond raw returns. A fund that earned 15% by taking enormous risks may be far less impressive than one that earned 10% with very little risk. Four classic risk-adjusted metrics each answer a different question about fund quality.
The Sharpe ratio scales excess return by total volatility — the right measure when the fund is your entire portfolio. The Treynor ratio scales instead by systematic (market) risk, appropriate when the fund is just one slice of a diversified portfolio. Jensen's alpha uses the CAPM to estimate how much the manager earned above what could have been achieved passively for the same beta. The Information ratio assesses active management quality by comparing the fund's return above a benchmark to the variability of that outperformance.
$$\text{Sharpe} = \frac{E[R_p] - R_f}{\sigma_p}$$ $$\text{Treynor} = \frac{E[R_p] - R_f}{\beta_p}$$ $$\alpha_J = E[R_p] - \bigl[R_f + \beta_p\,(E[R_m] - R_f)\bigr]$$ $$\text{IR} = \frac{E[R_p] - E[R_B]}{\sigma_{\epsilon}}$$The dashboard
Adjust the sliders to change fund characteristics. The Security Market Line chart shows where the fund sits relative to CAPM expectations, and the metrics panel updates all four risk-adjusted measures instantly.
Returns & Risk-Free Rate
Risk Measures
Benchmark Comparison
Risk-Adjusted Metrics
Jensen's α: Rp − [Rf + βp(Rm − Rf)] IR: (Rp − RB) / σε
Key takeaways
- Use the right metric for the context. Sharpe ratio is appropriate when comparing stand-alone portfolios; Treynor ratio is better when evaluating funds that will be combined with others, since idiosyncratic risk will be diversified away.
- Positive alpha is rare and meaningful. Jensen's alpha measures whether the manager truly added value beyond what passive exposure to the market's risk premium would have delivered. Persistent positive alpha is strong evidence of skill — but also rare in efficient markets.
- Diversification determines which risk to penalise. In a well-diversified portfolio only systematic (beta) risk matters. A fund with high total volatility but low beta may be penalised by Sharpe but rewarded by Treynor. Know which risk is borne by your investors.
- Benchmark choice drives the information ratio. The IR measures active management quality, but its value depends heavily on the chosen benchmark. A manager can inflate the IR by selecting an inappropriate (easy-to-beat) benchmark.
- No single metric tells the whole story. A fund can have a high Sharpe ratio but negative alpha (good risk-adjusted returns yet still below CAPM expectations for its beta), or a high IR but low Treynor. Always evaluate multiple metrics and consider the investment mandate.