FIN715: Performance Analysis of Bond Mutual Funds: Risk and Return

This report provides a comprehensive analysis of bond mutual funds, focusing on the performance of short-term corporate bonds versus intermediate government bonds. The study utilizes historical data from 184 mutual funds and employs descriptive statistical techniques to evaluate risk and return profiles. The report begins with an introduction to mutual funds, highlighting the importance of informed investment choices, followed by a review of relevant literature. The analysis includes the presentation of charts and tables illustrating risk profiles and the relationship between risk and investment type. The descriptive statistics, including measures of central tendency and dispersion, are used to compare the performance of different bond types. The report discusses the limitations of the study, such as the reliance on a single-year return data, and suggests potential extensions, including longitudinal studies and the inclusion of other investment types. The findings are aimed at assisting investors in making informed decisions by comparing risk and return characteristics, with recommendations for investors based on their risk appetites.

MATHEMATICAL FOUNDATIONS OF RISK MEASUREMENT
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Statement of the Problem and Introduction
There is a host of investment options which are offered to investors in the current
times. It is imperative that the investor must make the investment choice based on
his preferences and needs. A plethora of investors prefer passive or indirect
participation in the financial markets and thereby invest in mutual funds. The mutual
funds tend to invest in various assets such as equity, bonds, commodities, real
estate and offer units to the investors based on their contribution. A key issue with
regards to mutual funds is that for a given asset class, there are a host of mutual
funds which essentially makes it difficult for an investor to make a prudent choice. In
this background, the objective of this report is to provide assistance with regards to
analyse the performance of various mutual funds and determine the superior
amongst the given choices. For the given task, historical data with regards to 184
mutual funds has been provided which invest in intermediate bonds or corporate
bonds. Their performance analysis has been conducted using descriptive statistics
techniques.
A brief review of relevant literature
Mutual funds are defined as funds where investor savings are pooled for investment
purposes. This investment may be a in a host of instruments which range from debt,
equity, alternative investments, commodities and real estate. The source of data
here is considered as secondary as the information has not been collected by myself
or the university. The data provided had been collected by someone else and hence
termed secondary. The data provided for the given task would be termed as cross
sectional since the information about these mutual funds corresponds to a particular
time and the information in regards to all 184 mutual funds pertains to that particular
time only (Flick, 2015). For the purpose of the given study only three variables
namely type, one year return and risk have been analysed. Type variable is a
categorical variable with a nominal scale. One year return is a numerical variable of
continuous type which is measured using ratio scale. Finally, risk is also a
categorical variable since it is not expressed numerically and hence may be
measured using ordinal scale as grading of different risk levels is automatically
possible (Hillier, 2016). The measures of central tendency are mean & median while
to represent dispersion standard deviation and Interquartile range has been used.
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Presentation of appropriate charts and Tables
The risk profile with regards to the sample mutual funds is indicated as follows.
The graphical representation of the same is presented below.
Above average Average Below average
0
10
20
30
40
50
60
70
80
59
69
56
Risk
From the above representations, it is evident that most of the mutual funds belong to
the average and above average risk category. Only about 30% of the sample mutual
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funds belong to below average risk category. The analysis of risk is pivotal since
investors tend to choose mutual funds based on their risk preferences.
Further, the breakup of risk with regards to different investment type sample mutual
funds is shown below.
The graphical representation for the same is presented below.
From the above table, it is evident that the risk profile of the short term corporate
bonds based mutual fund does not differ significantly from the intermediate
government based mutual bonds. There is marginally lower risk associated with
intermediate government bonds based mutual funds.
Additional breakup of the risk profit for the sample mutual funds is shown as follows.
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The above table clearly confirms that the mutual funds investing in short term
corporate bonds tend to be less risky in comparison to those mutual funds which
have investment in intermediate government bonds. Evidence for the same is
evident since proportion of intermediate government bond based mutual fund in the
given sample is 47.28% while their representation in the above average risk mutual
fund is 49.15%. This is surprising since government bonds are typically considered
to be less risky than corporate bonds.
Appropriate use of numerical descriptive measures
The relevant descriptive statistics are indicated below.
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From the descriptive statistics above, it is evident that the 1 year average returns is
higher for intermediate government based mutual funds in comparison to the short
term corporate bond based mutual fund. However, this comes at a higher risk which
is indicated by the higher Interquartile range. The central tendency for these mutual
funds would be captured best through the use of median since the returns are
skewed and hence mean may be distorted. Since positive skew is present for the
variables listed above, hence neither of the variables is normally distributed and also
outliers may be present on the higher end (Eriksson and Kovalainen, 2015). The
presence of outliers for all the variables is confirmed from the box plot indicated
below.
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The shape of the returns can also be understood from the requisite histograms which
are summarised below.
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-8.8--3.8 1.2-6.2 6.2-11.2 11.2-16.2 16.2-21.2 21.2-26.2 26.2-31.2 31.2-36.2
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
The percentage return of 97 Short-Term Corporate
bond mutual funds
Classes
Frequency %
For all the histograms represented above, the shape is asymmetric which indicates
the presence of skew. Further, the skew would be positive since outliers are present
on the right (Hillier, 2016). The requisite cumulative frequencies representation is
shown below.
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-8.8--3.8 1.2-6.2 6.2-11.2 11.2-16.2 16.2-21.2 21.2-26.2 26.2-31.2 31.2-36.2
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
1-year return of 97 Short-Term Government bond mutual
funds (in cumulative percentages %)
Classes
Cumulative Frequency %
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The above cumulative frequency return graph clearly highlights that there are more
short term corporate bond based mutual funds in percentage terms which tend to
result in superior returns for the investors.
Limitations and Extensions
A key limitation of the given study is that the data with regards to the given mutual
funds corresponds to only one year return. A longer time frame with regards to
returns would have provided a more accurate picture as it is possible for the returns
during one year to be skewed by a particular event which is highly likely in the
globalised financial markets which are extremely prone to shock. Thus, reliability of
the given study may be low since if the study is replicated at a different time period,
the results may not be similar (Hair et. al.,2015). As a result, a longitudinal study of
mutual funds would be preferable. Also, it makes sense to consider other mutual
funds which are based on equity and other type of investments. Comparison
between the various mutual periods over a long period of time may be more useful
and reliable (Hastie, Tibshirani and Friedman, 2014).
Concluding remarks and recommendations
The findings of the given research has implications for the investors who wish to
compare risk and return when choosing the suitable mutual fund for investment.
However, in order to facilitate the same, it would be advisable if a longitudinal study
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is conducted whereby returns across the years are considered. Additionally, it makes
sense to consider the mutual funds focused on other investments as well thereby
allowing the investors a wider choice based on risk return characteristics. Inferential
statistics techniques ought to be used so that the potential observations may lead to
generalised results and potential theories which are of practical use. A key difference
between section 3 and section 4 is that while the number of mutual funds in the
higher than average risk is more for intermediate government based mutual funds
but the overall risk associated with mutual funds investing in short term corporate
bonds is observed based on 1 year return.
It may be recommended that the investor with low risk appetite should invest in
mutual funds investing in intermediate government bonds. However, investors with
high risk appetite must invest in mutual funds investing in short term corporate bonds
as higher returns are earned. The risk in general has been observed to be lower for
intermediate government bond based funds on account of lower standard deviation
during the given period.
Bibliography
Eriksson, P. and Kovalainen, A. (2015) Quantitative methods in business research.
3rd ed. London: Sage Publications.
Flick, U. (2015) Introducing research methodology: A beginner's guide to doing a
research project. 4th ed. New York: Sage Publications.
Hair, J. F., Wolfinbarger, M., Money, A. H., Samouel, P., and Page, M. J.
(2015) Essentials of business research methods. 2nd ed. New York: Routledge.
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