Question

A portfolio manager claims that the mutual fund he managed obtained a 10%, 6% and 8% return in the past three years, while the market return was only 8%, 4.8%, and 6.4% in the past three years. Based on this information, do you believe this manager is good at picking stocks? If not, what other information do you need?

Answer 1

From the given information, it seems that the manager is good at picking stocks. But, just the returns of the portfolio is not enough to judge the performance of the manager. We will have to consider the risk involved in the stocks.

We need the risk of the portfolio that was involved in achieving the returns. The manager could have used a risky portfolio that has paid off in the three years, but the next year, the portfolio could be blown up.

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