Skip to content

CA Final · Advanced Financial Management · Mutual Funds

Two funds are compared with a risk-free rate of 5% and market return of 12% (market standard deviation 14%). Fund P: return 15%, beta 1.1, standard deviation 16%. Fund Q: return 14%, beta 0.8, standard deviation 20%. Which conclusion is correct?

Fund P ranks higher on Sharpe at 0.625 versus 0.45, but Fund Q has the higher Treynor ratio of 11.25 versus 9.09 and higher Jensen's alpha of 3.4% versus 2.3%. So the rankings differ because Sharpe uses total risk while the others use beta.

  1. AP ranks higher on Sharpe, Treynor and Jensen's alphaCorrect
  2. BQ ranks higher on Treynor but P ranks higher on Sharpe
  3. CQ ranks higher on Sharpe because of lower beta
  4. DP ranks higher on Sharpe but Q has higher Jensen's alpha

Explanation

Sharpe: P = 10/16 = 0.625; Q = 9/20 = 0.45. Treynor: P = 10/1.1 = 9.09; Q = 9/0.8 = 11.25, so Q is higher on Treynor. Alpha: P = 15 - (5+1.1x7=12.7) = 2.3; Q = 14 - (5+0.8x7=10.6) = 3.4, so Q is higher. Hence P is higher on Sharpe while Q is higher on both Treynor and alpha.

Did you get it right without looking?

One question tells you little. A timed set on Mutual Funds shows your real accuracy, how long you take and where you lose marks.

Practise Mutual FundsFree diagnostic mock

More Mutual Funds questions