Question

True or False: A portfolio manager earned an average return of 9.32% per year over the last 10 yearscompared to 8.56% per year for the market benchmark (S&P 500 Index). It is fair for the portfolio manager to claim superior performance because he beat the market.

a. True                              b. False

The average return of a stock mutual fund over the last 12 years was 8.5 percent per year, comparedto 9.2 percent per year for the S&P 500. This is sufficient evidence to conclude that the mutual fund underperformed the S&P 500

.a. True, since both the fund and S&P 500 are composed of stocks

b. False, since the fund could just have been unlucky

c. True, since the conclusion is based on a long enough history

d. False, since the risk of the fund may not be equal to the risk of the S&P 500

Answer 1

1. TRUE

Since, there is track record of 10 years which is sufficiently long history and it represents the market as a whole. Since Mutual fund has generated returns better than the return of the market (index), we can say that mutual fund manager has outperformed the market.

Note: while reaching the conclusion, we can say that mutual fund is not any sector/small or Midcap fund etc. wherein returns of market can differ and may change our opinion.

2. TRUE, since conclusion is based on long enough history

Since, there is track record of 12 years which is sufficiently long history and it represents the market as a whole. Since Mutual fund has generated returns lower than the return of the market (index), we can say that mutual fund has underperformed the market