On the Role of Risk in the Morningstar Rating for Mutual Funds

24 Pages Posted: 22 May 2009 Last revised: 12 Oct 2009

See all articles by Francesco Lisi

Francesco Lisi

University of Padua - Department of Statistical Sciences

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Date Written: May 19, 2009

Abstract

In the mutual funds industry the rating process is very important, and Morningstar is surely the most influential international rating agency.

In this work we consider the problem of evaluating if the risk component is adequately accounted for in the Morningstar rating. To face this problem we compare the ratings produced giving different weights to the risk component.

The focus of the analysis is on testing the hypothesis that two similar rating procedures with different risk parameters (or, in statistical terms, two raters) are equivalent. To that end, first the notion of beta-equivalence is introduced and then a Monte Carlo test for the hypothesis of beta-equivalence is described.

Finally, to answer the question on the role of risk in the Morningstar rating, we analyze 1763 monthly return time series of US mutual funds. Results show that the current Morningstar classification, based on a risk-adjusted measure, only marginally accounts for risk and that if we want that risk really matters, the risk parameter should be increased.

Keywords: Rater agreement, beta-equivalence, mutual funds, Morningstar rating

JEL Classification: C10, G10, G20

Suggested Citation

Lisi, Francesco and Caporin, Massimiliano, On the Role of Risk in the Morningstar Rating for Mutual Funds (May 19, 2009). Available at SSRN: https://ssrn.com/abstract=1406961 or http://dx.doi.org/10.2139/ssrn.1406961

Francesco Lisi (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

V. Cesare Battisti, 241
Padova, 35122
Italy
+39 049 8274182 (Phone)
+39 049 8274170 (Fax)

Massimiliano Caporin

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
174
Abstract Views
1,313
Rank
341,907
PlumX Metrics