Yolanda has the option of investing in two different mutual funds. The return in the random walk
Question:
Yolanda has the option of investing in two different mutual funds. The return in the random walk fund tends to fluctuate wildly, earning substantial positive returns one year only to realize negative returns the next year. The CAPM fund has never had a year with a negative return and has a return very similar to the S&P/TSX composite index. However both random walk and the CAPM fund posted 10 year average annual returns of 10%.
All of the following statements regarding the comparison of the two mutual funds with similar long term performance are true : except
1- Yolanda should consider the consistency of a fund's return from year to year rather than a single compound rate of return.
2- Yolanda should select the fund with the lower volatility.
3- since both funds had the same long term performance, the fund with the greater volatility would be preferred since it has the potential to earn a higher return.
4- the CAPM fund would have a beta factor of about 1.
Managerial Economics
ISBN: 978-1118808948
8th edition
Authors: William F. Samuelson, Stephen G. Marks