Question: Month Return on Fund A Return on Fund B 1 5% 9% 2 6% 10% 3 5% 10% 4 6% 12% 5 5% 5% 6

Month

Return on Fund A

Return on Fund B

1

5%

9%

2

6%

10%

3

5%

10%

4

6%

12%

5

5%

5%

6

5%

8%

Beta

1.2

1.4

Risk-free rate

2%

a. Which fund should be selected based on mean-variance criterion? (9 marks)

b. Is your conclusion in part a) above necessarily correct? Why? (5 marks)

c. Which fund performed better if the selected fund was held in isolation? Why? (6 marks)

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