Question

22-I Consider the five funds shown below: 2.0 1.6a 3.5 0.9 0.8 1.20 0.98 0.95 0.90 0.80 0.60 3 4 0.9a Significant at 5 percent level. a. Which funds returns are best explained by the market's returns? b. Which fund had the largest total risk? c. Which fund had the lowest market risk? The highest? d. Which fund(s), according to Jensen's alpha, outperformed the market?

Answer 1

Solution

a) Fund 1's returns are is best explained by the market returns as it has highest R2

b) Standard deviations are needed to answer this part of the question.

c) Fund 4 has the lowest market risk as the fund 4 has the lowest Beta (i.e. 0.8) and Fund 5 has the highest market risk as the fund 5 has the highest Beta (i.e. 1.20)

d) According to Jensen's alpha, only fund 5 has a significantly positive alpha.