Question

Two mutual funds have the following data related to their performances.

Description	Vasco Fund	Majelan Fund
Asset under management (m)	$600	$500
Security sales over the year (m)	$480	$100
Expense ratio	1.15%	0.25%
Pre-tax return	15%	13%
Tax-adjusted return	11.5%	10.2%
Tracking Error	47.8%	4.50%
Standard deviation of returns	20%	18%
Beta	1.5	1.2

1. Which fund is likely active and which one is passive? Why?
2. Which fund is tax efficient?
3. Assume the risk-free rate is 2% and the market rate of return is 10%. Use the tax-adjusted returns given above and determine which fund performance is better by using

i) Sharpe Ratio

ii) Treynor’s ratio

iii) Are the two rankings the same or different? Why or why not?

Answer 1

1..Vasco fund is active fund because it has higher expense ratio and higher tracking error

2. Vasco Fund

15 * (1-t) = 11.5

t = 23.33%

Majelan Fund

13 * (1-t) = 10.2

t = 21.53%

Majelan Fund is more tax effecient

3. Sharpe ratio = Rp - Rf / sd of portfolio

Vasco Sharpe ratio = 11.5 - 2 / 20 = 0.475

Majelan Sharepe ratio = 10.2 - 2 / 18 = 0.455

Treynor ratio = Rp - Rf / Beta

Vasco = 11.5 - 2 / 1.5 = 6.33

Majelan = 10.2 - 2 / 1.2 = 6.83

Particulars	Vasco	Majelan	Decision
Sharpe	0.475	0.45	Vasco is better
Treynor	6.33	6.83	Majelan is better

Two rankings differ from each other because of Majelan has relatively higher standard deviation when compared to its beta, Therefore lower excess return per unit of standard deviaition but higher excess return per unit of beta