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Finance Dictionary and Glossary of Investment Terms
Morningstar 3-, 5-, and 10-Year Risk Rating
Definition 1.
A measure of a mutual fund''s downside volatility compared to other funds in its category. To calculate this ""risk score"" for a given period (three, five, or 10 years), Morningstar plots monthly fund returns in relation to riskless Treasury bill returns. They add the amounts by which the fund trails the T-bill return each month and divide that total by the period''s total number of months. The resulting score expresses how risky the fund is relative to the average fund in its category. If the fund''s score is in the top 10% of its broad investment category (domestic stock, international stock, taxable bond, or municipal bond) it receives a 5 (highest). If it scores in the next 22.5%, it receives a 4 (above average). If it scores in the middle 35%, it receives a 3 (average). If it scores in the lower 22%, it receives a 2 (below average). If it scores in the bottom 10%, it receives a 1 (lowest).
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