# Appraisal Ratio

## What it is:

An appraisal ratio is the ratio of a mutual fund's alpha to its risk.

## How it works (Example):

The formula for the appraisal ratio is:

Appraisal Ratio = Alpha / Fund's Unsystematic Risk

Let's assume Mutual Fund XYZ has an alpha of 0.06 and an unsystematic risk of 0.60. Using this information and the formula above, Mutual Fund XYZ's appraisal ratio is  0.06 / 0.60 = 0.01.

Alpha and unsystematic risk values for specific funds can be found at: morningstar.com, tdameritrade.com, and other online broker sites.

## Why it Matters:

The appraisal ratio measures a fund's return per unit of risk. However, the return in question is only alpha -- that portion of return generally attributed to the fund manager's stock-picking and fund-management skills. Thus, the appraisal ratio is a measure of how much return the fund manager brings to a fund per unit of risk. The risk in question is unsystematic risk -- that portion of risk associated with the risk of the investments rather than the risk associated with the entire securities market in general.

Related Terms View All
• Though most of the trading is done via computer, auction markets can also be operated via...
• Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
• Savings bonds are bonds issued by the U.S. government at face values ranging from \$50 to...
• The basic idea behind break-even point is to calculate the point at which revenues begin...
• If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...