Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods such as technical indicators or economic data. Because it is extremely difficult to predict the future direction of the stock market, investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain invested.
The Morningstar Rating is a scale to measure the risk- adjusted return and costs incurred by each fund, calculating within each Morningstar category. The rating is calculating only for funds that have data on at least 3 years.
Ranked the funds according to the methodology MRAR ( Morning Risk Adjust Return), the first 10% funds of a category, receives five stars, the next 22.5% three stars, 35% further three stars, while 22.5% further and further 10% are assigned respectively two and one star.
Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper "Portfolio Selection," published in 1952 by the Journal of Finance.
A major insight provided by MPT is that an investment's risk and return characteristics should not be viewed alone, but should be evaluated (Alpha, Beta and R-Squared) by how the investment affects the overall portfolio's risk and return.
MPT shows that an investor can construct a portfolio of multiple assets that will maximize returns for a given level of risk. Likewise, given a desired level of expected return, an investor can construct a portfolio with the lowest possible risk. Based on statistical measures such as variance and correlation, an individual investment's return is less important than how the investment behaves in the context of the entire portfolio.
