Fund Ratings: The Method Reconsidered

40 Pages Posted: 30 Oct 2014 Last revised: 5 Jan 2015

See all articles by Fausto Corradin

Fausto Corradin

GRETA Associati

Domenico Sartore

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: October 26, 2014


This paper compares the performance of a quadratic utility function and discusses how to change its characteristic parameter, ARA, so that rating is consistent with return and risk measurements. In particular, this parameter is modified in such a way that a positive return Fund has always a rating higher than one with a negative yield. This modification confirms the possibility of building a new ranking procedure which is more coherent with the actual behaviour of investors.

The paper moreover demonstrates that the CRRA utility function has not such behaviour, it is possible therefore a ranking in which a Fund with negative return has a rank greater than a Fund with positive return. This seems counterintuitive with respect to the expectations of investors. The CRRA utility function also shows a very slight link with the standard deviation and, consequently, the induced ranking depends mainly on the returns.

The CRRA utility function here considered is that one used by Morningstar.

Keywords: Quadratic Utility Function, Positive and Negative Returns, Absolute Risk Aversion, Morningstar Rating, Truncated Normal Distribution, Incomplete Gamma Function, Italian Pension Fund

JEL Classification: G11, G14, G24

Suggested Citation

Corradin, Fausto and Sartore, Domenico, Fund Ratings: The Method Reconsidered (October 26, 2014). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 17/WP/2014, Available at SSRN: or

Fausto Corradin

GRETA Associati ( email )

San Marco 3870
Venezia, 30124

Domenico Sartore (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121

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