Question

A mutual fund with a beta of 1.1 has outperformed the S&P500 over the last 20 years. We know that this mutual fund manager _______________________.A. must have had superior stock selection abilityB. must have had superior asset allocation abilityC. must have had superior timing abilityD. may or may not have outperformed the S&P500 on a risk adjusted basis

Answer 1

Answer: D. may or may not have outperformed the S&P 500 on a risk adjusted basis

Explanation:

Market beta is 1 and the beta of the mutual fund is 1.1. This means that the fund is holding assets that are riskier than the market. If we adjusted for risk therefore, the mutual fund may have under performed against the S&P 500.

With the beta so close to 1 though it cannot be said with certainty that if adjusted for risk the manager under-performed because the manager could have indeed outperformed the S&P 500 on a risk adjusted basis.

The information is not enough to determine the answer so the answer is D.