IFC Analyzing Mutual Fund Performance 4

Question 1

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

Accepted Answer

Returned 2.5% more than what CAPM predicted given its beta

Answer

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

Question 2

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

Accepted Answer

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

Answer

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

Question 3

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

Accepted Answer

Different benchmarks reflect different market exposures and risk profiles

Answer

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

Question 4

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

Accepted Answer

3.9%

Answer

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

Question 5

Survivorship bias in mutual fund performance databases occurs because:

Accepted Answer

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

Answer

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

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Analyzing Mutual Fund Performance 4