SmartMoney - The Wall Street Journal

R-Squared

R-squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An R-squared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund's movements can be explained by movements in its benchmark index. Therefore, R-squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance.

Sales Charge

Fees paid to a brokerage house by a buyer of shares in a load mutual fund.

Sharpe Ratio

The Sharpe ratio, provided by Lipper, is based on a risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated using standard deviation and excess return to determine reward per unit of risk. First, the average monthly return of the 90-day Treasury bill (over a 36-month period) is subtracted from the fund's average monthly return. The difference in total return represents the fund's excess return beyond that of the 90-day Treasury bill, a risk-free investment. An arithmetic annualized excess return is then calculated by multiplying this monthly return by 12. To show a relationship between excess return and risk, this number is then divided by the standard deviation of the fund's annualized excess returns. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.

Standard Deviation

Standard deviation is a statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time, the total returns of any given fund are expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, a fund's total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that a fund's returns fall in a typical bell-shaped distribution. In any case, the greater the standard deviation, the greater the fund's volatility.

Subsequent Purchase

This indicates the smallest permissible additional purchase a fund will accept in an existing account.

Treynor Ratio

A gauge of risk-adjusted performance calculated by dividing the excess return of a portfolio above the risk-free rate by its beta. Higher values are desirable and indicate greater return per unit of risk.

Turnover Ratio

A measure of a fund's trading history that is expressed as a percentage. A fund with a 100% turnover generally changes the composition of its entire portfolio each year. A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities. Funds with higher turnover incur greater brokerage fees for affecting the trades. They also tend to distribute more capital gains than low-turnover funds, because high-turnover funds are constantly realizing the gains. A change in a fund's general turnover pattern can indicate changing market conditions, a new management style or a change in the fund's investment objective.