This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Funds With the Best Returns Relative to Risk

The rise in volatility in recent months is prompting concerns about the health of the stock market. It's certainly something you should take into consideration in selecting a mutual fund.

But while the amplitude of stock price movements has been on the upswing, it's arguably a return to historical norms from what has been an abnormally low level of market volatility.

A study of 1,468 open-end mutual funds in Ratings' database indicates that, even with the recent uptrend in volatility, the medium-term variability of returns remains significantly below the level of three years ago. Only diversified U.S. stock funds were included in the study. Funds that focus on stocks in a specific market sector and funds that track a stock index were excluded.

The measure of volatility used in the study was the annualized standard deviation of total returns for the trailing 36 months. This is basically defined as the annualized value of the up and down bounds within which approximately 68% of the month-to-month fluctuations in a fund's monthly returns deviate from its annualized rate-of-return trend.

Thus, a low standard deviation means that a fund's returns have been relatively steady during the measurement period. Because many investment analysts equate large up and down fluctuations with uncertainty, standard deviation is often used as a measure of investment risk.

The average annualized three-year standard deviation for the group was 10.28% for the 36 months ended Sept. 30, 2007. That's significantly lower than the corresponding value of 17.38% for the three years ended Sept. 30, 2004.

Moreover, despite the recent bulge in volatility, the current standard deviation values are lower than three years ago across all subsectors of the group of funds in the study. The 2007 and the 2004 standard deviation values each were divided in 10 groups, or deciles. Every decile's average standard deviation for 2007 was markedly lower than the corresponding 2004 grouping, as can be graphically seen in the bar chart below.

In fact, the six deciles with the highest volatility this year each averaged a lower standard deviation than the very lowest decile three years ago.

Click here for larger image.

If you are worried about the increasing frequency of triple-digit daily fluctuations in the Dow Jones industrial Average, you should take funds' standard deviations into account when evaluating portfolio additions. The chart below shows how funds with different ranges of standard deviation in September 2004 performed over the subsequent three years. The ranges indicated by each line represent the three-year annual returns achieved by 68% of the funds in that decile grouping. The vertical dash in each line represents the average annual return for the group.

The average standard three-year deviation for each decile group appears at the bottom of the chart.

Click here for larger image.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $92.99 -0.67%
FB $118.15 0.08%
GOOG $698.78 0.44%
YHOO $37.01 2.80%
TSLA $213.13 -4.20%


Chart of I:DJI
DOW 17,691.94 +40.68 0.23%
S&P 500 2,055.03 +3.91 0.19%
NASDAQ 4,734.1640 +8.5250 0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs