A fund manager asks his investment advisors to help him choose one of the mutual funds provided
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Question:
A fund manager asks his investment advisors to help him choose one of the mutual funds provided by an investment company. He is planning to invest in his portfolio to bring more diversification. But he insists that the fund to be included should have high return and low risk. The advisors are presented with the data of those two funds which consist of real estates , public equity ,fixed income and private equity . Details about the funds, performance and their weights are given in the table below :
Mutual Fund A | Mutual Fund B | |||
Assets | Return | Weights in $ | Return | Weights in $ |
Public Equity | 0.118 | 24500 | 0.105 | 32000 |
Fixed income | 0.072 | 42500 | 0.098 | 38000 |
Real Estate | 0.215 | 12000 | 0.225 | 9600 |
Private Equity | -0.072 | 8500 | -0.062 | 7800 |
Required
- 1. Calculate the expected return [ E(x)] of the two funds. Which fund is more attractive?
- 2. Calculate the variance and standard deviation for each of their return. Why is standard deviation a better measure than variance ?
- 3. Calculate the coefficient of variation. What information does this measure give to the user? Use example to illustrate it .
- 4. Canada bond rate is 2.8%. Calculate the Sharpe ratio. What do you understand by risk free rate and why do we use it in this calculation
- 5. Put your results on a decision table and justify your choice of the mutual fund if you were the investment advisor.
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