Analyzing Mutual Fund Performance Flashcards

Jensen's alpha of +2.5% means a fund:

Answer: Returned 2.5% more than what CAPM predicted given its beta

Jensen's alpha is the excess return above what the Capital Asset Pricing Model would predict based on the fund's systematic risk (beta).

A mutual fund with a Sharpe ratio of 1.2 is generally considered:

Answer: Good because it exceeds 1.0, indicating strong risk-adjusted returns

A Sharpe ratio above 1.0 is generally considered good, indicating the fund earns more than one unit of return per unit of risk.

Why is comparing a Canadian equity fund's performance to a global equity benchmark inappropriate?

Answer: Different benchmarks reflect different market exposures and risk profiles

A valid benchmark must match the fund's investment universe; otherwise, performance differences reflect different market exposures, not manager skill.

A fund's calendar-year returns were: Year 1: +20%, Year 2: −15%, Year 3: +10%. What is the geometric mean return?

Answer: 3.9%

Geometric mean = (1.20 × 0.85 × 1.10)^(1/3) − 1 = (1.122)^(1/3) − 1 ≈ 3.9%.

Survivorship bias in mutual fund performance databases occurs because:

Answer: Funds that closed or merged due to poor performance are excluded from historical data

When failed or merged funds are removed from databases, the remaining historical data overstates average industry performance.

The 'capture ratio' in mutual fund analysis measures:

Answer: Up-market and down-market performance relative to the benchmark separately

Capture ratios split performance into upside capture (fund vs. benchmark in rising markets) and downside capture (fund vs. benchmark in falling markets).

A fund has an upside capture ratio of 90% and a downside capture ratio of 60%. This indicates the fund:

Answer: Captures 90% of gains but only 60% of losses — a favorable asymmetric profile

Capturing more upside (90%) than downside (60%) relative to the benchmark is a desirable asymmetric return profile.