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2) An investment advisor is comparing performance of two mutual funds each of which is designed...

2) An investment advisor is comparing performance of two mutual funds each of which is designed to outperform the S&P 500.

The Freedelity Fund returned 19%

The JPStanley Fund returned 16%.

The betas of the Freedelity & JPStanley funds are 1.5 & 1.0 respectively.

T-Bill rate = 6%; and the S&P 500 returned 14%.

Using CAPM, Which fund was the superior performer? Why?

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Homework Answers

Answer #1

"JPStanley Fund has a higher Treynor ratio and Jensen's Alpha, JPStanley Fund was the superior performer."

Detailed Answer

a. Expected Return (Using CAPM, Re = Rf + b*(Rm-Rf))

1. Return of Freedelity Fund = 6.00% + 1.50*(14.00%-6.00%) = 18.00%

2. Return of JPStanley Fund = 6.00% + 1.00*(14.00%-6.00%) = 14.00%

b. Treynor Ratio ((Portfolio Return - Risk Free Return) / Portfolio Beta)

1. Freedelity Fund = (19.00% - 6.00%) / 1.50 = 8.67%

2. JPStanley Fund = (16.00% - 6.00%) / 1.00 = 10.00%

c. Jensen's Alpha (Actual Return - Expected Return)

1. Freedelity Fund = (19.00% - 18.00%) = 1.00%

2. JPStanley Fund = (16.00% - 14.00%) = 2.00%

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