This chapter describes a simple graphical method for capturing the essence of what is permanent and distinctive about the performance of a fund, including the effects of fund management. It also introduces a concept of fund performance and a measure for rating fund-management performance. The characteristic line contains information about both expected rate of return and risk. The slope of the line measures volatility. Thus, a steep slope means that the actual rate of return for the fund in question is relatively sensitive to fluctuations in the general stock market. A gentle slope indicates that the fund in question is relatively insensitive to market fluctuations. A volatility of two means that a one-percent increases or decreases in the rate of return demonstrated by the Dow-Jones Average is accompanied, on the average, by a two-percent increase or decrease in the rate of return demonstrated by the particular fund in question. The characteristic line also contains information about management's ability to obtain a consistently higher return than the competitors.
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