Standard deviation of returns is often used as a measure of a mutual fund’s vola

Q: Standard deviation of returns is often used as a measure of a mutual fund’s vola

a) Note that the test statistic is given by F = s1^2 / s2^2 Thus, here, if we treat Morningstar.com as group 1, and American Century as group 2, F = 28.44^2 / 14.11^2 = 4.06 [ANSWER]

ID: 3382296 • Letter: S

Question

Standard deviation of returns is often used as a measure of a mutual fund’s volatility (risk). A larger standard deviation of returns is an indication of higher risk. According to Morningstar.com (June 17, 2010), the American Century Equity Income Institutional Fund, a large cap fund, has a standard deviation of returns equal to 14.11 percent. Morningstar.com also reported that the Fidelity Small Cap Discovery Fund has a standard deviation of returns equal to 28.44 percent. Each standard deviation was computed using a sample of size 36. (a) Calculate the value of the test statistic. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Note that the test statistic is given by

F = s1^2 / s2^2

Thus, here, if we treat Morningstar.com as group 1, and American Century as group 2,

F = 28.44^2 / 14.11^2 = 4.06 [ANSWER]

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Standard deviation of returns is often used as a measure of a mutual fund’s vola

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Standard deviation of returns is often used as a measure of a mutual fund’s vola

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