Domestic open-end equity mutual fund performance evaluation using extended TOPSIS method with different distance approaches

摘要

The most commonly used measures for evaluating the competing mutual funds are “Treynor Ratio”, “Sharpe Ratio” and “Jensen’s Alpha”. One also uses another measure called the “Information Ratio”. However, it is not clear which measure is the most robust. The purpose of our study is to evaluate the performance of mutual funds under the broad framework of multi-attribute decision analysis approach where each criterion can be taken into consideration in making a final ranking of the mutual funds. In this paper we adopt the concepts of “Ideal” and “Anti-Ideal” solutions as suggested by Hwang and Yoon (1981), and study the extended technique for order preference by similarity to the ideal solution (TOPSIS) method using two different “distance” ideas, namely – “Minkowski’s Lλ metric” and “Mahalanobis” distances. The broad framework with the two aforementioned distances is then applied to evaluate the performance of 82 Taiwanese mutual funds for consecutive 34 months. The empirical results show that using TOPSIS methods incorporated Minkowski’s distance measure to evaluate the mutual funds’ performance perform well.