Analyzing Mutual Fund Performance Flashcards
7 cards from real IFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Analyzing Mutual Fund Performance flashcards as text
An advisor is evaluating two funds with the same 5-year annualized return of 9%. Fund X has a Sharpe ratio of 0.8 and Fund Y has a Sharpe ratio of 1.3. The advisor should generally recommend:
Answer: Fund Y, because it provides better risk-adjusted returns
When returns are equal, the fund with the higher Sharpe ratio is preferable as it achieved those returns with less risk.
Which regulatory body in Canada sets the standards for how mutual fund performance must be disclosed to investors?
Answer: Canadian Securities Administrators (CSA)
The CSA coordinates securities regulation across Canadian provinces and sets disclosure requirements for mutual fund performance reporting.
Under CRM2 (Client Relationship Model Phase 2) regulations, mutual fund dealers must report to clients:
Answer: Personal rate of return on the investor's account in dollar and percentage terms
CRM2 requires dealers to provide clients with their personal rate of return showing both the dollar amount and percentage return on their specific account.
A mutual fund reports a 3-year annualized return of 12% but the average investor return is 8%. This gap is best explained by:
Answer: Investors buying after strong performance and selling after poor performance (return gap)
The behavior gap occurs when investors chase returns by buying high and selling low, resulting in personal returns below the fund's time-weighted return.
When evaluating a bond fund's performance, which risk-adjusted measure is most appropriate given that beta is less meaningful for fixed-income?
Answer: Sharpe ratio
The Sharpe ratio uses standard deviation (total risk) which is relevant for all asset classes, making it more appropriate than beta-based measures for bond funds.
A fund's performance record shows strong returns over the past 2 years under a new manager but weak returns over the prior 5 years under the previous manager. A prospective investor should:
Answer: Attribute the recent 2-year record to the current manager and evaluate accordingly
Manager tenure is critical; a fund's track record only reflects the current manager's skill for the period they were actually managing the fund.
The 'style drift' problem in mutual fund performance analysis refers to:
Answer: A fund's investment style diverging from its stated mandate or benchmark
Style drift occurs when a fund deviates from its stated investment approach (e.g., a value fund beginning to hold growth stocks), making peer group comparisons misleading.