The total performance at risk is stipulated, and the same information is given relative to the fund's benchmark. Currently, if a portfolio manager has sold a put option on a bond, the transaction would be buried, under current reporting standards, in amortized premium income. The risk associated with being long that number of bonds would be assigned to the portfolio as measured by its duration. Delta is a variation of the Sharpe ratio, but because it substitutes average return for the risk-free return it is applicable to both stock and fixed income portfolios. Israelsen does not believe that standard deviation on its own is a good surrogate for risk, since a fund may have a lot of variance around a very high mean return, or conversely, a low variance around a low return.
Delta summarizes both the concept of mean return and volatility in one number.
George Oberhofer, fixed income director at the Frank Russell Company, has proposed a graphic scenario analysis that would unmask the hidden derivative risks in mutual fund portfolios. If the market moves below a preset trigger level, however, the option is automatically extinguished, leaving the portfolio completely exposed on the downside. However, if you look at the same portfolio over a range where the option gets knocked out, then all of a sudden the floor drops out. One fund provider, Twentieth Century Funds, has suggested to the SEC a visual presentation of risk using past performance data that may find greater acceptance from the mutual fund community than the consultants' more analytically rigorous methodologies. A chart accompanying the graph shows the fund's best, worst, median, and mean returns for each of these intervals compared to an appropriate benchmark.