Appraisal Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 1029

Definition: Appraisal Ratio

Appraisal Ratio is used as a tool to judge the ability of a given investment fund to acquire the best investments which give the best returns from multiple options.

It is given by:

Appraisal Ratio = Alpha / Unsystematic Risk 

Alpha: Shows how much the portfolio is giving returns compared to the benchmark

Unsystematic Risk: It is the risk associated specifically to the company. It can be diversified by investing in different type of instruments. Managers of an active fund try to beat their benchmark index. By comparing the returns of their stock picks with the specific risks associated, the appraisal ratio is measured. The higher the ratio, the better it is.

The Appraisal Ratio measures return on investment for a every unit of risk. The return considered is only the “Alpha” part that helps in pointing the stock picking skills of the Fund manager. 

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