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The Ranking Properties of the Morningstar Risk-Adjusted Rating

23 Pages Posted: 5 May 2003  

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)

Date Written: 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 Classification: G11

Suggested Citation

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

Kevin C.H. Chiang (Contact Author)

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)

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)

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 Wisen

University of Alaska Fairbanks - School of Management (SOM) ( email )

P.O. Box 756080
Fairbanks, AK 99775-0500
United States

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