Question

In: Finance

The studies of mutual fund performance cited in the text found that mutual funds typically had...

The studies of mutual fund performance cited in the text found that mutual funds typically had ___.

a. about the same returns before expenses and lower returns than benchmark portfolios after expenses

b. higher returns than the benchmark portfolio after expenses

c. lower returns than the benchmark portfolio before expenses

d. roughly the same returns as the benchmark portfolio after expenses

e. None of the above

Solutions

Expert Solution

INTRODUCTION

MUTUAL FUNDS A mutual fund is a type of professionally managed investment fund that pools money from many investors to purchase securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund's investments and attempt to produce capital gains and/or income for the fund's investors. Some key features of a mutual fund are as follows

  • Professional Management – Each fund’s investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of all of these.
  • Fund Ownership – an investor owns shares of mutual fund, not the individual secures. Mutual funds permit the investors to invest small amounts of money. The pool can be used to buy even those securities which would have been out of reach of a common individual investor. Thus investors in mutual funds benefit from being involved in a large pool of cash invested by other people.
  • Diversified investment – mutual funds have a diversified investment portfolio which helps in minimizing the risk as the fluctuation in prices of the individual securities has less effect on the fund’s performance. Benefits of mutual funds
  • Risk diversification – mutual funds help to diversify the risk associated with the securities,because overall risk of the particular mutual fund is proportionately divided among all the unit holders of mutual fund.
  • Operated by professional manager – mutual funds are kept and operated by the professional managers who are professional in this particular field so the unit holders enjoy the professional operation on these mutual funds.
  • Passive investment style – mutual fund is a passive investment style in which the owners of the unit holders do not participate directly but they keep these units passively. They don’t need to participate directly they only have to purchase the units and keep them in passive way.

We need to check the expense ratio of mutual funds before finalising on a given fund. ... The fund having Sharpe ratio higher than the category average shows that ... the fund manager is able to generate higher returns than the benchmark. ... The portfolio turnover ratio tells you how often the fund manager ...

Conclusion

so answer B is currect that is higher returns than the benchmark portfolio after expenses


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