Question

homeworklib You want to evaluate three mutual funds using the information ratio measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 19%. The average returns, residual standard deviations, and betas for the three funds are given below. Average Return Residual Standard Deviation Beta Fund A 20 % 4.00 % 0.8 Fund B 21 % 1.25 % 1.0 Fund C 23 % 1.20 % 1.2 The fund with the highest information ratio measure is Multiple Choice Funds A and C (tied for highest). Funds A and B (tied for highest). Fund A. Fund C. Fund B.

Answer 1

Answer:

The fund with the highest ratio is Fund B.

Explanation:

Risk-free return = 6%

The average return on the market portfolio = 19%

The ratio equation formula is as follows:

FUND A: Return on fund - Risk free rate - Beta (Return on market portfolio -  Risk free rate)/Standard deviation of fund

FUND A : 20 - 6 - 0.8(19 - 6 ) / 4 = 0.9

FUND B : 21 - 6 - 1(13)/1.25 = 1.6

FUND C : 23 -6 - 1.2 (13 ) /1.2 = 1.167

Therefore, the fund with the highest ratio is Fund B.