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The Ranking Properties of the Morningstar Risk-Adjusted Rating

Kevin C.H. Chiang
University of Alaska Fairbanks - School of Management (SOM); Louisiana State University, Baton Rouge - Department of Finance

Kirill Kozhevnikov
University of Oregon - Department of Finance

Craig H. Wisen
University of Alaska Fairbanks - School of Management (SOM)

March 14, 2003

Abstract:
The study examines the ranking properties of the Morningstar risk-adjusted rating (RAR). We find that the RAR and the excess return from the CAPM regression yield similar star ratings. In contrast, we document systematic differences between the star ratings produced by the RAR and the excess return estimated from the Fama-French [1993] three factor model. Approximately 77% of domestic equity funds with a ten-year five-star Morningstar rating do not maintain their five stars under the null hypothesis of the Fama-French three factor model. The study concludes that the sole reliance upon the Morningstar star rating to select U.S. equity funds may not result in an optimal allocation across style categories for a multi-fund portfolio.

Keywords: Morningstar, Fund Rating

JEL Classifications: G11

Working Paper Series

Date posted: May 05, 2003 ; Last revised: May 05, 2003

Suggested Citation

Chiang, Kevin C.H., Kozhevnikov, Kirill and Wisen, Craig H., The Ranking Properties of the Morningstar Risk-Adjusted Rating (March 14, 2003). Available at SSRN: http://ssrn.com/abstract=387981 or doi:10.2139/ssrn.387981

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Contact Information

Kevin C.H. Chiang (Contact Author) University of Alaska Fairbanks - School of Management (SOM) ( email ) P.O. Box 756080 208C Bunnell Building Fairbanks, AK 99775-0500 United States 907-474-7049 (Phone) 907-474-5219 (Fax)
Louisiana State University, Baton Rouge - Department of Finance ( email ) E.J. Ourso College of Business Administration Baton Rouge, LA 70803 United States 225-753-4978 (Phone) 225-388-6366 (Fax)
Kirill Kozhevnikov University of Oregon - Department of Finance Charles H. Lundquist College of Business 1208 University of Oregon Eugene, OR 97403-1208 United States
Craig Hanes Wisen University of Alaska Fairbanks - School of Management (SOM) ( email ) P.O. Box 756080 Fairbanks, AK 99775-0500 United States

Abstract

References (9)

Date posted: May 05, 2003 ; Last revised: May 05, 2003

Suggested Citation

Contact Information

Kevin C.H. Chiang (Contact Author)

Kirill Kozhevnikov

Craig Hanes Wisen