As an internationally renowned fund rating agency, Morningstar's evaluation of the fund is based on the risk-adjusted income. Fund investment is risky, and risk is the uncertainty of income. Two funds with the same income may have very different degrees of risk. Therefore, when evaluating fund performance, we should not only look at the rate of return, but also examine the risk factors. Morningstar adjusts the risk of each fund's income, and then compares it with similar funds and gives a rating.

However, different theoretical systems have different understandings of "risk-adjusted income". The common method is to make the risk levels of the two funds equal through the adjustment of leverage, and then compare them. In this way, the rating of the fund will not be greatly affected by the amount of risky assets or leverage. The classic Sharp ratio is such an adjustment method.

Another risk adjustment method is based on investors' risk preference, which holds that investors like high returns and hate risks, no matter how risks and returns are combined. So when rating, reward income and punish risk. The star rating method of Morningstar Fund is based on investors' risk preference. The risk of Morningstar inspection is mainly reflected in the fluctuation of the monthly return rate of funds, especially the downward variation.

So, how does Morningstar measure the risk-adjusted income of the fund?

"Morningstar risk-adjusted return" is the core index of Morningstar star rating, also known as MRAR. MRAR measurement has the following characteristics.

1, which does not stipulate that the excess returns obey a specific distribution;

2. In all cases, risks should be punished;

3. Its theoretical basis-expected utility theory is accepted by professional investors and analysts.

The measurement of MRAR is based on the expected utility theory, which holds that investors prefer predictable low returns to unpredictable high returns; Willing to give up part of the expected income in exchange for more certain income. On this premise, the utility function is constructed according to the final value of each portfolio, and then the expected utility is calculated, and all portfolios are sorted according to their values.

Morningstar adjusts the return of each fund by "punishing risks" according to the fluctuation degree of monthly return of each fund during the calculation period, especially the downward fluctuation degree; The greater the fluctuation, the more punishment. If the returns of the two funds are similar, Morningstar will give more risk punishment to those with large fluctuations in returns. Through the above methods, it reflects the fluctuation of the monthly performance of the fund, and pays more attention to reflecting the downside fluctuation risk of the fund assets; So as to reward those who have sustained and stable performance and reduce the possibility of covering up the inherent risks due to the outstanding short-term performance of the fund.