Question

Explain how the variation over time in a fund manager’s asset allocation choices (the balance between risky and risk-free investments) can create challenges for the evaluation of the fund’s performance.

Answer 1

Fund Manager fund allocation is not uniform in nature and it is dynamic according to the changing market perspective and future projection and an active fund manager will always be trying to reallocate his asset portfolio in accordance with the market needs, so he can maximize the rate of return from the market.

These variation over time in the fund manager asset allocation will be creating challenge for evaluation of the fund manager performance because the assets are not sustainable in nature and according to that the variation in these assets are generally higher, so they are not having an uniform mean variance and they are showing high degree of standard variation along with the expected rate of return of this portfolios always keep on fluctuating so there needs to be a proper strategy for evaluation of the performance.

Beta is generally reflecting the systematic risk associated with the portfolio and it is a measure of the volatility of the portfolio in relation to the overall market portfolio and when the fund manager asset allocation will be constantly changing between risky and risk free investment, it will mean that the Beta of the portfolio will be very highly fluctuating and it will be very complex in order to evaluate these funds because they are not having an uniform sensitivity to the market fluctuations.

These are the factors according to which we can summarise that variation over time in a fund manager asset allocation choices between risky and risk free investment can create challenges for evaluation of the performance of the fund.