Literature Review Example in Finance

A study was conducted by Arugaslan, Ed and Ajay (2007) to evaluate the risk-adjusted performance of US mutual funds. Study employed a sample of 20 largest US-based mutual funds for the period 1995-2004. Study used Quarterly returns for computing the measures of return and risk. Modigliani and Modigliani (M Square) and Sortino Ratio are used to evaluate the performance. Study identified the performance evaluation over a five-year (2000-2004) and ten-year (1995-2004) investment horizon. The authors concluded that funds with the highest returns faced higher risk due to which funds lose attractiveness.

Rao and Ravindran (2003) conducted a research to examine the performance of Indian mutual funds in a bear market for the period of September 1998 to April 2002. Initially study employed a sample of 269 open ended schemes (out of total schemes of 433) for computing relative performance index. But when study excluded those funds whose returns were less than risk-free returns, only 58 schemes were left. Study computed logarithmic returns from monthly closing NAVs and applied Treynor (1965)’s ratio, Sharp’s ratio, Sharp’s measure, Jensen’s measure, and Fama’s measure to evaluate the performance. The results showed that Out of 269 schemes, 49 were under performers, 102 were par performers and 118 were out performers of the market. Study concluded that most of the mutual fund schemes in the sample of 58 were able to satisfy investor’s expectations by giving excess returns over expected returns.

In order to analyze the Performance Selectivity, Market Timing and Persistence of Danish Mutual Fund a study was conducted by Christensen (2005). Study tried to provide evidence on performance evaluation for mutual funds that invest purely in the Danish market as well as mutual funds that invest outside Denmark. For this purpose this study employed a sample of 47 Danish mutual funds consisting of 34 equity funds and 13 fixed income funds from January 1996 to June 2003. Study applied single index model and a multi-factor model to analyze the selectivity. Parametric and non-parametric methodologies were used to examine performance persistence while the timing ability was analyzed with the help of quadratic regression and option approach. The results indicated that net of expenses none of the 47 Danish mutual funds had been able to obtain superior performance. The researchers concluded that Danish mutual funds performed neutrally, returns were non-persistent and Danish mutual funds had no timing ability. 

A study was conducted by Francis, Kim and Faff (2006) to examine the US mutual fund’s performance using the multiscaling approach: wavelet analysis. Study collected the monthly mutual fund returns for the US over the period January 1991 to December 2005. Sharpe (1966) ratio was used at various time scales to evaluate the performance of these three groups of mutual funds. Results indicated that since the risk and value (performance) were timescale-dependent therefore any attempt to measure performance must consider the investment horizon effect. Researcher concluded that in case of index fund, the size of funds does not matter in terms of the performance but in case of institutional and active funds, the funds with the higher net asset values consistently performed better than those with the lower net asset values.

In order to evaluate the diversification benefits and performance persistence of U.S.-based global bond funds a study was conducted by Polwitoon and Tawatnuntachai (2006). For this purpose a sample of 188 global and 531 domestic bond funds was taken for the period 1993 to 2004. Study compared the performance of global bond funds to performance of domestic bond funds using both unconditional and conditional Sharpe (1966) ratios. The results showed that global funds underperformed broad-based benchmark indexes but concluded that the under performance was less than the funds’ expense ratio. Results also indicated that global funds provide higher total return and comparable risk-adjusted return to domestic bond funds. 

Boudreaux, S.P., Dan and Suzanne (2007) conducted a study to examine the risk adjusted returns of international mutual funds for the period of 2000-2006. For this purpose a sample of ten portfolios of international mutual fund was taken and risk-adjusted performance was calculated by using Sharpe (1966)’s Index of Reward to Variability ratio. US market of mutual funds was taken as the benchmark. The results showed that the performance of nine out of ten of the international mutual fund was higher than the U.S. market. Those portfolios which contained only U.S stock mutual funds under perform on a risk adjusted the funds that contained all international mutual funds. The authors concluded that Investors may not fully take advantage of possible portfolio risk reduction and higher returns if international mutual funds were excluded.

Abdullah, Taufiq and Shamsher (2007) conducted a research to analyze the difference in terms of performance between conventional and Islamic mutual funds in the context of Malaysian capital market. For this purpose a sample of 65 funds out of which 14 were Islamic was taken. These monthly returns of these funds were analyzed from 1992-2001 by using Sharpe (1966) index, adjusted Sharpe (1966) index, and Jensen Alpha and KLCI was used as a market benchmark. Results showed that the performance of Islamic funds was lower than conventional funds during bullish economic conditions whereas it performed better than conventional funds during bearish economic trends. Results also showed that the two types of funds were unable to get at least 50 per cent market diversification levels.

In order to examine the risk adjusted performance of Slovenian mutual funds, a study was conducted by Jagric, Boris and Sebastjan and Vita (2007). Study employed sample of only those funds which were older than three years in the period 1 January 1997 to 31 December 2003. Weekly returns of all the mutual funds were calculated for the sample period. Study used Ljubljana Stock Exchange - SBI20 index (which is a market capitalization weighted average of the 15 largest companies) as a benchmark. Sharpe (1966) ratio, Treynor (1965) ratio, Jensen’s Alpha, and Treynor (1965) -Mazuy timing measure were used to evaluate the risk-adjusted performance. The researchers found that the rankings obtained by applying both the Sharpe (1966) and Treynor (1965) rules to be almost the same, implying that funds were well diversified and concluded that all analyzed funds outperformed the market. Study also concluded that some of the funds performed extremely well compared to other mutual funds worldwide.

 

Arugaslan, Ed and Ajay (2008) examined the risk-adjusted performance of US-based international equity funds from 1994-2003. The analysis was done for five-year period 1999-2003 and ten-year period 1994-2003.  For this a sample of 50 large US-based international equity funds was taken and a new method of measurement Modigliani and Modigliani (M squared) was applied. The performance was compared with both domestic and international benchmark indices. The results showed that the risk has great impact on the attractiveness of Funds. Higher return funds may lose attractiveness due to higher risk while the lower return funds may be attractive to investors due to the lower risk.