Problem 18-04

Consider the following historical performance data for two different portfolios, the Standard and Poors 500, and the 90-day T-bill.

Investment	Average Rate of		Standard
Vehicle	Return		Deviation		Beta	R2
Fund 1	26.20	%	22.24	%	1.294	0.744
Fund 2	12.56		13.60		0.950	0.723
S&P 500	16.66		12.30
90-day T-bill	5.50		0.30

1. Calculate the Fama overall performance measure for both funds. Round your answers to two decimal places.

   Overall performance (Fund 1): %

   Overall performance (Fund 2): %

2. What is the return to risk for both funds? Do not round intermediate calculations. Round your answers to two decimal places.

   Return to risk (Fund 1): %

   Return to risk (Fund 2): %

3. For both funds, compute the measures of (1) selectivity, (2) diversification, and (3) net selectivity. Do not round intermediate calculations. Round your answers to two decimal places. Use a minus sign to enter negative values, if any.

   	Selectivity		Diversification		Net selectivity
   Fund 1		%		%		%
   Fund 2		%		%		%

4. Explain the meaning of the net selectivity measure and how it helps you evaluate investor performance. Which fund had the best performance?

   The net selectivity is an unexplained portion of the excess -Select-(return,risk) -Select- (reduced by the cost of incomplete, increased by the benefit from perfect) diversification. The higher the net selectivity the -Select- (better, worse) investor performance is. -Select- (Fund 1,Fund 2) had the best performance.