You have just read the annual report of a mutual fund.It boasted of a 26% return and advertised that it had beat the market return last year by three percentage points.In doing some research you discover the fund had a beta of +1.5 and the return on risk-free Treasury securities was 15.0%.Assuming a market risk premium of 8.0% should be used to evaluate performance means that
A)the fund's performance was impressive;three percentage points is significant,given the above data.
B)the fund's performance was good,but not impressive;it beat the market,but only by one percentage point not three.
C)the fund's performance was no better than what you would have expected.
D)the fund's performance was actually a percentage point less than what you would have expected.

Question

Quizplus · Accepted Answer

The expected return of the fund, based on its beta and the market risk premium, is 20%. (15% + 1.5 x 8%) Therefore, the fund's actual return of 26% is only 6 percentage points better, not 9 as advertised. Therefore, the fund's performance is actually a percentage point less than what you would have expected.

You Have Just Read the Annual Report of a Mutual