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How to analyse a fund's risk/reward profile

When choosing a fund you should consider its risk - as well as its performance

When choosing a fund you probably have a good look at its performance figures, but do you ever think about its risks? There are a number of statistics that aim to capture a fund's past risk/reward profile, including its mean return, standard deviation, Sharpe ratio and maximum drawdown.

Often called the average return, the 'mean return' is the easiest method for understanding a fund's past performance. You simply add up all a fund's returns over a period of time - typically three years - and divide the sum by the number of years. The advantage of this statistic is that it's simple to understand, but it can be heavily influenced by extreme outliers.

Darius McDermott, managing director at FundCalibre, says: "The mean return can be affected where returns are split into two likely outcomes, for example, if a portfolio goes up or down a lot the mean will be somewhere in between - a result that doesn't typically happen."

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