Raroc Model In Open-end Fund Performance Evaluation In Empirical Research

The measurement of investment performance has been the main concerned issue for managers and investors. In general, Sharpe ratio, Treynor's measure and Jensen's measure are used to evaluate the performance of investment portfolio. That traditional tool can value the performance of investment portfolio in a certain extent, but they also have some limitations. Though Sharpe Ratio is the well-known method when under the hypothesis of normal distribution of return, but it will be bias when the return is non-normality. Besides, Sharpe Ratio uses the standard deviation for the risk evaluation. The standard deviation only measures the floating risks, but not the declining risk. Thus, we can't acquire the real risk. So, this article propose the Value at risk method to the traditional indexes and use the model of RAROC (Risk Adjust Return on Capital) to measure the performance of investment.VAR can accurately measure risk without requiring the hypothesis of normal distribution of return. Therefore ,we use the VAR instead of the standard deviation to get the adjusted Sharpe Ratio RAROC₁; and use the benchmark return instead of the risk-free rate of interest to get the adjusted Treynor's measure RAROC₂. This article's aim is to measure the investment performance by using the RAROC model.This article made such conclusion as follows: the distribution of the yield of investment performance obey to the normal distribution basically, but all of their kurtosis index and skewness index differ with the normal distribution. So RAROC model based on the VAR can give the higher estimate of the mutual funds which have closer relations with the benchmark portfolio.