Evaluating the performance of a mutual fund
Suppose you have just read the yearly report of a mutual fund. It boasted of a 26 percent return and advertised that it had beaten the market return last year by 3% 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%. Assuming a market risk premium of 8.0 percent should be used to evaluate performance means that:
1. the funds performance was impressive; three percentage (%) points is significant, given the above data.
2. the funds performance was good , but not impressive, it beat the market, but only by one percentage point, not three.
3. the funds performance was no better than what you would have expected.
4. the funds performance was actually a percentage point less than what you would have expected.
