An empirical analysis of funds’ alternative measures in the mean absolute deviation (MAD) framework

Abstract

Purpose

The purpose of this paper is to provide an attempt to evaluate the risk-adjusted performance of international mutual funds using the risk statistic generated by the mean absolute deviation (MAD) and promote the ability of portfolio managers and investors to make the logical decisions for selecting different funds using the new optimized measures.

Design/methodology/approach

This study evaluates the performance of 50 international mutual funds using optimized risk-adjusted measures by the MAD over the monthly period 2001-2010. Using 50 linear programming models, the MAD is first computed by the linear programming models, and then seven performance measures of Treynor, Sharpe, Jensen’s α, M2, information ratio (IR), MSR, and FPI are optimized and proposed by the MAD to evaluate the mutual funds.

Findings

The empirical evidence detects that the MAD is an important determinant to evaluate the funds’ performance. Using the MAD statistic, this paper shows that new optimized measures are mostly over-performed by the benchmark index; in addition, these optimized measures have close correlation with each other. The results, therefore, detect the importance of using new optimized measures in evaluating the mutual funds’ performance.

Practical implications

The result of this study can be directly used as an initial data for decision of investors and portfolio managers who are seeking the possibility of participating in the global stock market by the international mutual funds.

Originality/value

This paper is the first study which optimizes the variance of returns in the MAD framework for each fund to propose new seven optimized measures of Treynor, Sharpe, Jensen’s α, M2, IR, MSR, and FPI.

Citation

Tavakoli Baghdadabad, M.R. (2015), "An empirical analysis of funds’ alternative measures in the mean absolute deviation (MAD) framework", International Journal of Emerging Markets, Vol. 10 No. 4, pp. 726-746. https://doi.org/10.1108/IJoEM-12-2011-0112