Appraisal Ratio

It goes without saying that one of the best talents a fund manager can have is the ability to make great stock picks. If you are shopping around for a fund manager, you might check out their appraisal ratio.

What is it? Basically, RISK-ADJUSTED returns...not just returns. That is...a given fund manager spends 5 bucks on a lottery ticket and wins. It was a 1 in a billion chance to win a million bucks. Bad risk. But they won. They'd get a horrible score on the risk-adjusted return lens into which you're viewing their appraisal ratio, even though the 5 dollar "investment" did phenomenally well.

In a fund structure, the appraisal ratio calculates the amount of return of the manager’s stocks as compared to the benchmark over the specific risk of those choices. The higher the ratio, the better.