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Definition: Moring Star Risk Rating
It is the rating provided by the investment research firm Morningstar. This is established from the year 1985 and the ratings are provided looking at past performance of stock in terms average risk- return it achieves and the consistent cash flow provided. The rating is scaled from 1 to 5. One denotes to lowest ranking with 5 the best.
These rating are provided for exchange traded funds and also cover mutual funds which are publicly traded. These are not typically buy or sell guideline and more so as a starting point to do further research. They are just to help investor quickly spot promising stocks. It provides a single star and five star to top 10 and bottom 10 percent of the funds it covers. Further 35 percent of funds are provided 3 star with 2 and 4 star provided to 22.5 percent of the funds.
A simple indicator could be the value of Alpha. This measures the difference between funds actual and expected returns for a assumed level of risk. A positive value will indicate better performance than that indicated by its beta value. This can in terms of value added by a manager. However this is merely one of many tools used in the evaluation of rating. The value of alpha is calculated as:
Alpha = Excess Return - ((Beta x (Benchmark - Treasury))