Your mutual fund manager has invested all of your money into a fund whose investment objective is
Question:
Your mutual fund manager has invested all of your money into a fund whose investment objective is to outperform the Russell 2000 index. The Russell 2000 index includes 2000 stocks that have a small market capitalization, so it it is made up primarily of small size publicly listed companies and as such is not representative of the market portfolio. The reason why your fund manager is benchmarking against this index is that he primarily invests in small size companies too.
Your mutual fund manager is very proud to tell you that his fund outperformed his benchmark (Russell 2000) by +1% per year over the last five years as the average return on the mutual fund over the last five year was 20%. The average return on the Russell 2000 over the last five years was 19%. During the last five years, the average return on the Russell 3000 index (the 3000 largest market capitalization stocks, representing 99% of the US stock market and therefore a good proxy for the market portfolio) was 16%, the average risk-free rate was 6%, the standard deviation of the returns for the Russell 3000 was 0.2, the standard deviation of the returns for the Russell 2000 was 0.280, the covariance between the mutual fund and the Russell 3000 was 0.060, the covariance between the mutual fund and the Russell 2000 was 0.0785.
How would you evaluate the performance of the mutual fund? What is your conclusion?
Basic Business Statistics Concepts And Applications
ISBN: 9780132168380
12th Edition
Authors: Mark L. Berenson, David M. Levine, Timothy C. Krehbiel