Appraisal Ratio Formula & Example

What is the Appraisal Ratio

The appraisal ratio is a financial measure of how much risk a fund manager takes based on the stocks it selectes.  The appraisal ratio is comprised of two inputs the fund's alpha, which is the fund's risk-adjusted return and the portfolio's unsystematic risk.  Unysystematic risk is a fancy way of saying how much risk is associated with non-market specific items.  Fund managers attempt to hedge against this risk by picking a basket of stocks.

Appraisal Ratio Formula

Below is the basic formula for the appraisal ratio:

The higher the number the better the fund manager is at picking stocks.  For example, let's say a fund manager's return for the year is 20% and the unsystematic risk is equal to 3%.  The appraisal ratio for this fund manager would be 6.667.