Question
You are using Jensen's alpha to analyze the performance of two small-cap funds and will select one of those funds for the client to purchase.
You are using Jensen's alpha to analyze the performance of two small-cap funds and will select one of those funds for the client to purchase. During the performance period being measured, the market returned 12.8% and Treasury bills returned 4.2%. The two funds had the following performance:
Fund | Standard Deviation | Beta | Return |
---|---|---|---|
1 | 21.2% | 1.19 | 18.1% |
2 | 23.8% | 1.07 | 17.5% |
Which fund would you select, and why?
A)
Fund 1, because its alpha (0.656) is higher than Fund 2's alpha (0.559)
B)
Fund 2, because its alpha (0.124) is lower than Fund 1's alpha (0.117)
C)
Fund 1, because its alpha (0.121) is higher than Fund 2's alpha (0.113)
D)
Fund 2, because its alpha (0.041) is higher than Fund 1's alpha (0.037)
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