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You have just read the annual report of a mutual fund. It boasted of a 26% return and advertised that it had beaten the market return last year by three percentage points. In doing some research you discover the fund had a beta of +1.5 and the return on risk free Treasury securities was 15%. Assuming a market risk premium of 8.0% should be used to evaluate performance means that:

1. the funds performance was impressive; three percentage points is significant, given the above data.

2. the funds performance was good , but not impressive, it beat the market, but only by one percentage point, not three.

3. the funds performance was no better than what you would have expected.

4. the funds performance was actually a percentage point less than what you would have expected.

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Answer: 4

First, I will find the expected return by using CAPM (Capital Asset ...

Solution Summary

This solution is comprised of a detailed explanation to evaluate the performance of a mutual fund.