IFC - Investment Funds in Canada Analyzing Mutual Fund Performance Questions and Answers

Question 1

An investor is comparing two Canadian equity funds.
Fund A generated a 12% return with a standard deviation of 15%.
Fund B generated a 10% return with a standard deviation of 8%.
Assuming a risk-free rate of 2%, which performance metric is most appropriate for determining which fund delivered a better risk-adjusted return?

Accepted Answer

Sharpe Ratio

Answer

Alpha

Answer

Beta

Answer

R-squared

Question 2

A fund manager for an actively managed large-cap fund claims to have exceptional stock-picking ability. If this claim is true, what would you expect the fund's alpha to be?

Accepted Answer

Significantly positive

Answer

Close to zero

Answer

Negative

Answer

Equal to the fund's beta

Question 3

An analyst observes that a global equity fund has an R-squared of 0.92 against its benchmark, the MSCI World Index. Which of the following is the most accurate interpretation of this figure?

Accepted Answer

92% of the fund's returns can be attributed to the movements of the MSCI World Index.

Answer

The fund has a 92% chance of outperforming the benchmark.

Answer

The fund is 8% less volatile than the benchmark.

Answer

The fund manager's active decisions contributed 92% of the fund's total return.

Question 4

A mutual fund's performance report indicates that it is ranked in the 1st quartile for the past five years. What does this ranking signify?

Accepted Answer

The fund performed better than at least 75% of its peer group.

Answer

The fund's performance was in the bottom 25% of its peer group.

Answer

The fund's performance was average compared to its peer group.

Answer

The fund's returns were within the top 1% of its peer group.

Question 5

A Canadian equity fund has a beta of 1.3. If its benchmark, the S&P/TSX Composite Index, falls by 5% in a month, what is the fund's expected performance?

Accepted Answer

A decrease of 6.5%

Answer

A decrease of 3.85%

Answer

A decrease of 5%

Answer

An increase of 6.5%

Question 6

When analyzing a mutual fund's risk, what does a higher standard deviation indicate?

Accepted Answer

The fund's returns are more volatile and less consistent.

Answer

A higher likelihood of positive returns.

Answer

The fund is highly correlated with its benchmark index.

Answer

The fund manager is taking on less risk than the market.