Risk and Rates of Return in British Unit Trusts: Bull and Bear Market Movements, 1973–8

Abstract

For both the investor who seeks to construct a portfolio by sometimes using ‘managed’ portfolios such as unit trusts, and for the professional portfolio manager who needs to assess his performance, the measurement of risk and rate of return on a portfolio is crucial. As argued in the introduction to this volume, only ‘systematic’ risk is relevant for investors holding well-diversified portfolios; all other risk may be ‘diversified away’. The appropriate measure of risk in this instance is the beta coefficient, the exposure of a portfolio to ‘market’ or ‘systematic’ fluctuations. There has been much discussion in recent literature suggesting that parameters, such as portfolio beta, may be non-stationary (see Fabozzi and Francis 1977, 1979; Jensen 1968; Klemkosky and Maness 1978; Kon and Jen 1978; Treynor and Mazuy 1966; all using US mutual fund data). It is, of course, of great importance for the investor and the portfolio manager to know the nature of the fluctuations in beta for a particular fund: in a rising market we would expect a fund managed successfully with respect to market timing to increase its exposure to systematic risk and to decrease it when the market falls.