An investor is evaluating the performance of two actively managed mutual funds, A and B. The annual risk-free rate of return over the period was 4%, and the average annual return of the market portfolio was 12%. The standard deviation of the market portfolio returns was 20%. The table below reports the statistics and the regression estimation results of the single- index model for annual excess returns of the two funds. The investor is choosing fund A or fund B to become part of his actively managed stock portfolio. Which fund should he choose?

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Average annual excess return Standard deviation of annual excess returns Single-index model estimates Standard deviation of the model residuals Fund A 10.6% 31% 1% + 1.2 (RM-If) 22% Fund B 8.4% 20% 2% +0.8 (RM-If) 9% Average annual excess return Standard deviation of annual excess returns Single-index model estimates Standard deviation of the model residuals Fund A 10.6% 31% 1% + 1.2 (RM-If) 22% Fund B 8.4% 20% 2% +0.8 (RM-If) 9%

Answer rating: 100% (QA)

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