Risk Analysis-Separate Accounts

Mean 3 Year, 5 Year, 10 Year

Represents the annualized total return for a separate account over 3-, 5, and 10-year time periods.

Standard Deviation 3 Year, 5 Year, 10 Year

A statistical measurement of dispersion about an average, which, for a separate account, depicts how widely the returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that are most likely for a given separate account. When a separate account has a high standard deviation, the predicted range of performance is wide, implying greater volatility.

Sharpe Ratio 3 Year, 5 Year, 10 Year

A risk-adjusted measure developed by Nobel Laureate William Sharpe. It is calculated by using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the separate account’s historical risk-adjusted performance. The Sharpe ratio is calculated for the past 12 quarters period by dividing a separate account’s annualized excess returns by its annualized standard deviation.

Since this ratio uses standard deviation as its risk measure, it is most appropriately applied when analyzing a separate account that is an investor’s sole holding. The Sharpe Ratio can be used to compare two separate accounts directly on how much risk a separate account had to bear to earn excess return over the risk-free rate.

Alpha 3 Year, 5 Year, 10 Year

A measure of the difference between a separate account’s actual returns and its expected performance, given its level of risk as measured by beta. A positive alpha figure indicates the separate account has performed better than its beta would predict. In contrast, a negative alpha indicates the separate account’s underperformance, given the expectations established by the separate account’s beta. All MPT statistics (alpha, beta, and R-squared) are based on a least-squared regression of the separate account’s return over Treasury bills (called excess return) and the excess returns of the separate account’s benchmark index.

Beta 3 Year, 5 Year, 10 Year

A measure of a separate account’s sensitivity to market movements. The beta of the market is 1.00 by definition. Morningstar calculates beta by comparing a separate account’s excess return over Treasury bills to the market's excess return over Treasury bills, so a beta of 1.10 shows that the separate account has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the separate account’s excess return is expected to perform 15% worse than the market’s excess return during up markets and 15% better during down markets.

R-Squared (R2) 3 Year, 5 Year, 10 Year

Reflects the percentage of a separate account’s movements that can be explained by movements in its benchmark index. An R-squared of 100 indicates that all movements of a separate account can be explained by movements in the index. Thus, index separate accounts that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the separate account’s movements can be explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the separate account’s movements can be explained by movements in the benchmark index.

Best Fit Index

The market index that shows the highest correlation with a separate account over the most-recent 36 months, as measured by the highest R-squared. Morningstar regresses a separate account's monthly excess returns against the monthly excess returns of several well-known market indexes.

The following indexes are regressed against each equity separate account:

     

The following indexes are regressed against each bond separate account:

Best Fit Alpha

Alpha is a measure of the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta. The best fit Alpha represents the market index that shows the highest correlation between a separate account and an index over the most-recent 36 months or 12 quarters based on the best fit R-squared.

To find the best fit R-squared, Morningstar regresses a fund's monthly excess returns against the monthly excess returns of several well-known market indexes.

Best Fit Beta

Beta is a measure of a fund’s sensitivity to market movements. The beta of the market is 1.00 by definition. Morningstar calculates beta by comparing a fund’s excess return over Treasury bills to the market's excess return over Treasury bills. The best fit beta represents the market index that shows the highest correlation between a fund and an index over the most-recent 36 months or 12 quarters based on the best fit R-squared.To find the best fit R-squared, Morningstar regresses a fund's monthly excess returns against the monthly excess returns of several well-known market indexes.

Best Fit R-Squared (R2)

R-squared reflects the percentage of a separate account’s movements that can be explained by movements in its benchmark index. An R-squared of 100 indicates that all movements of a separate account can be explained by movements in the index. The best fit R-squared score represents the market index that shows the highest correlation between a separate account and an index over the most-recent 36 months (12 quarters).

To find the best fit R-squared, Morningstar regresses a separate account's monthly excess returns against the monthly excess returns of several well-known market indexes.

Bear Market % Rank

The bear-market rank details how a separate account has performed during bear markets. For stock separate accounts, a bear market is defined as all months or quarters in the past five years that the S&P 500 index lost more than 3%; for bond separate accounts, it’s all months or quarters in the past five years that the Barclays Aggregate Bond index lost more than 1%. Morningstar adds a separate account’s performance during each bear-market month to reach a total bear-market return. Based on these returns, each separate account is then assigned a percentile ranking. Stock separate accounts are ranked separately from bond separate accounts. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing separate account in a category will always receive a rank of 1.

Total Quarters

The total number of quarters (since inception) of the separate account.

Positive Quarters

This information reflects the number of quarters that had a positive return for the separate account.

Negative Quarters

This information reflects the number of quarters that had a negative return for the separate account.

Tracking Error

Tracking error shows how closely a separate account has tracked a benchmark. It measures the standard deviation of the difference between the performance of the separate account and a specific benchmark, typically an index. A high tracking error indicates that the separate account is not closely tracking the index. A low tracking error indicates that the separate account’s performance is closely aligned with the benchmark’s.