CHAPTER 14: Understanding Mutual Fund Performance

Question 1

Measuring Mutual Fund Performance Calculations (Gain %)

Answer 1

Gain % = (Ending NAVPS - Beginning NAVPS)/ Beginning NAVPS

ex. ending NAVPS = 3
Beginning NAVPS = 1

((3-1) / 1) x 100

Question 2

Sharpe Ratio

Answer 2

higher Sharpe Ratio than a similar fund, your portfolio has lower risk and a potentially higher rate of return.

This is to comapre two portfolios.

Question 3

Performance Assessments

Answer 3

Are used to compare the portfolio to relevant benchmarks to see if they have a good return.

Question 4

2 Benchmarks

Answer 4

Benchmark index

Comparison Universe

Question 5

Comparison Universe

Answer 5

The most popular method of relative performance evaluation is to compare a fund’s return with the performance of a large number of other mutual funds with similar characteristics

Question 6

Quartile Rankings

Answer 6

assess the performance of a fund manager relative to a peer group

1st quartile – top 25 funds with highest returns
2nd quartile – next 25 best performers
3rd quartile – next 25 performers
4th quartile – bottom 25 performers in the peer group

Question 7

5 facts to consider

Answer 7

• Comparison to a fair peer group universe
• Reliable benchmarks
• Analysis of returns
• Weaknesses on the evaluation methods
• Scrutiny of fund manager’s practices