Updated on March 2, 2023
Batting average is a term used to calculate an investment or fund manager’s ability to match or exceed an index’s return/performance. The benchmark range for batting average is from 0-100% and a higher average is considered a better indicator of an Investment manager’s performance. The term Batting average is taken from baseball where players are ranked statistically based on their batting average, along with other parameters
How is batting average calculated?
A batting average is calculated by dividing the number of days/months/ quarters, during which the Investment manager matches or exceeds the benchmark index by the total number of days/months/quarters considered and multiplying it by 100. A batting average of 0 per cent will mean that the manager did not reach the target even once. An investment manager outperforming the market 15 days out of 30 days considered would have an average batting rate of 50 percent. The longer the time taken for the sample size, the more is the significance of the test.
What are the drawbacs of Batting average?
Batting average is used for measuring the performance of Investment Managers, however it has a few limitations, like:
It depicts only the returns and does not take into account the risk assumed by the Investment manager
Batting average does show the scale of outperformance