Analyzing Mutual Fund Performance Flashcards

A mutual fund's standard deviation increased from 8% to 14% over the past year. What does this indicate?

Answer: The fund's returns became more volatile

Standard deviation measures return volatility, so an increase means returns varied more widely around the mean.

Which metric best measures how much excess return a fund generates per unit of total risk taken?

Answer: Sharpe ratio

The Sharpe ratio divides excess return over the risk-free rate by the fund's standard deviation (total risk).

A fund has a beta of 0.75. If the market rises 10%, the fund is expected to rise approximately:

Answer: 7.5%

Beta of 0.75 means the fund moves 75% as much as the market, so 0.75 × 10% = 7.5%.

The information ratio compares a fund manager's excess return against which benchmark?

Answer: The fund's designated benchmark index

The information ratio measures active return (fund return minus benchmark return) relative to tracking error against the benchmark.

A fund's R-squared value is 0.35 relative to the S&P/TSX Composite. What does this mean?

Answer: 35% of the fund's movement is explained by the benchmark

R-squared indicates what percentage of a fund's variability is explained by movements in the benchmark index.

When comparing two funds with identical returns, which factor would make Fund A preferable to Fund B under modern portfolio theory?

Answer: Fund A has lower standard deviation

With equal returns, the fund with lower risk (standard deviation) offers better risk-adjusted performance.

A growth fund returned 18% last year while its benchmark returned 14%. If the fund's tracking error was 6%, what is its information ratio?

Answer: 0.67

Information ratio = (Fund return − Benchmark return) / Tracking error = (18% − 14%) / 6% = 0.67.