Question: There are two actively managed mutual funds P and Q with information of their historical returns given below. Their benchmark is the market portfolio whose

There are two actively managed mutual funds P and Q with

There are two actively managed mutual funds P and Q with information of their historical returns given below. Their benchmark is the market portfolio whose information is also given in the table. Risk-free rate rr = 2%. Fund P Fund Q Market Portfolio Average return 10% 12% 8% Average excess return 8% 10% 6% Standard deviation 16% 25% M-square 4% Beta 2 0.5 1 C. Suppose you are the portfolio manager of a large endowment fund and build portfolios based on multiple actively managed funds, i.e., fund of funds. Now you want to select one more actively managed fund to be added to your existing portfolio. Which fund is a better choice out of funds P and Q, and why? (2 pts)

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