Question

 

1. Compare the performance of the two equity funds (Fund A and Fund B), based on the information given below.

Fund	Average Return (%)	Standard deviation of returns (%)	Beta
A B	19.5 15.7	15.5 9.5	1.5 1.2

Additional information:

The risk-free rate is 5% and the return on the market index is 12%. The tracking error is 8.5% for Fund A, and 4% for Fund B.    Evaluate and discuss.

Answer 1

Required rate of return A	risk free rate +(market return-risk free return)*beta	5+(12-5)*1.5	15.5
required rate of return B	risk free rate +(market return-risk free return)*beta	5+(12-5)*1.2	13.4
Portfolio	average return	required return	Standard deviation	Beta	Tracking error
A	19.5	15.5	15.5	1.5	8.5
B	15.7	13.4	9.5	1.2	4
Portfolio A is performing well in comparison to Portfolio B as A's average return is much greater than required rate of return and it is also greater than Portfolio B
Overall risk is higher in case of portfolio A and beta is also higher in case of A. thus we can say that Portfolio A is more risk in comparison to B so high risk involve in portfolio A
Tracking error is higher in case of Portfolio A in comparison to B which means A is outperforming the market index while tracking error is low in case of B.
Thus overall conclusion is that Portfolio A is risky but offer higher returns in comparison to B and also outperforming to market performance