Question
A fund manager asks his investment advisors to help him choose one of the mutual funds provided by an investment company. He is planning to
A fund manager asks his investment advisors to help him choose one of the mutual funds provided by an investment company. He is planning to invest in his portfolio to bring more diversification. But he insists that the fund to be included should have high return and low risk. The advisors are presented with the data of those two funds which consist of real estates , public equity ,fixed income and private equity . Details about the funds, performance and their weights are given in the table below :
Mutual Fund A
Mutual Fund B
Assets
Return
Weights in $
Return
Weights in $
Public Equity
0.125
52500
0.125
48000
Fixed income
0.084
21500
0.078
64000
Real Estate
0.205
9000
0.215
5600
Private Equity
-0.092
10500
-0.068
9800
Required
- Calculate the expected return [ E(x)] of the two funds. Which fund is more attractive?
- Calculate the variance and standard deviation for each of their return. Why do people prefer Standard deviation to Variance measure?
- What does variance or standard deviation measure?
- Calculate the coefficient of variation. What information does this measure give to the user? Use example to illustrate it .
- Canada bond rate is 3.5%. Calculate the Sharpe ratio. What do you understand by risk free rate and why do we use it in this calculation?
- Put your results on a decision table and justify your choice of the mutual fund if you were the investment advisor
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