The following data are for the performance of two mutual funds: Fund A Average R

Question

The following data are for the performance of two mutual funds: Fund A Average Return Standard Deviation Beta 14% 5.7 1.2 0.9 Fund E 16% 9.0 The average return for the market over the period was 13.5%. Assume a 3% risk free rate of return. Determine which fund had the best performance using Sharpe's and Treynor's (10 marks) (10 marks) (10 marks) How would you evaluate a Fund manager's performance?(10 marks) (10 marks) a) index b) Use Jensen's index to determine how mutual funds A and B performed. c) Which index do you consider to be more useful? d) e) Is there any evidence that fund managers can outperform the market?

Explanation / Answer

required rate of return A= risk free rate+(market return-risk free rate)*beta

3+(13.5-3)*1.2

15.6

required rate of return B= risk free rate+(market return-risk free rate)*beta

3+(13.5-3)*.91

12.555

Portfolio A

Portfolio B

Sharpe ratio

(expected return-risk free rate)/standard deviation

1.93

1.44

Portfolio A is better

Treyner ratio

(expected return-risk free rate)/beta

0.09

0.142857

Portfolio B is better

jensen ratio

Jensen’s Alpha = Expected Portfolio Return – [Risk Free Rate + Beta of the Portfolio * (Expected Market Return – Risk Free Rate)]

14%-15.6%

-1.600%

16%-12.55%

3.4500%

Portfolio B is better

Treynor index is the best index because it is best used to compare two investments within the same category or to compare an investment's Treynor ratio with that of a market benchmark or category average

Portfolio B performance is better in comparison of portfolio A in terms of Treynor and jensen index

Portfolio A can out perform the market as its beta is 1.2 which is better than market beta of 1

required rate of return A= risk free rate+(market return-risk free rate)*beta

3+(13.5-3)*1.2

15.6

required rate of return B= risk free rate+(market return-risk free rate)*beta

3+(13.5-3)*.91

12.555

Portfolio A

Portfolio B

Sharpe ratio

(expected return-risk free rate)/standard deviation

1.93

1.44

Portfolio A is better

Treyner ratio

(expected return-risk free rate)/beta

0.09

0.142857

Portfolio B is better

jensen ratio

Jensen’s Alpha = Expected Portfolio Return – [Risk Free Rate + Beta of the Portfolio * (Expected Market Return – Risk Free Rate)]

14%-15.6%

-1.600%

16%-12.55%

3.4500%

Portfolio B is better

Treynor index is the best index because it is best used to compare two investments within the same category or to compare an investment's Treynor ratio with that of a market benchmark or category average

Portfolio B performance is better in comparison of portfolio A in terms of Treynor and jensen index

Portfolio A can out perform the market as its beta is 1.2 which is better than market beta of 1

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.