You Want to Evaluate Three Mutual Funds Using the Information

question 58

Multiple Choice

You want to evaluate three mutual funds using the information ratio measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 19%. The average returns, residual standard deviations, and betas for the three funds are given below. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\20\% \\21\% \\23\% \\\end{array}\begin{array}{lll}\text {Residual } \\\text { Standand } \\\text { Deviation.} \\\text {4.00\% } \\\text {1.25\% } \\\text { 1.20\% } \\\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 0.8 } \\\text { 1.0 } \\\text { 1.2 } \\\end{array}\end{array}$
The fund with the highest information ratio measure is

• A) Fund A.
• B) Fund B.
• C) Fund C.
• D) Funds A and B (tied for highest).
• E) Funds A and C (tied for highest).

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Definitions:

Acquisition Method

An approach in accounting for business combinations where the acquiring entity is treated as having purchased the net assets of the acquiree.

Direct and Indirect Costs

Direct costs are directly traceable to a product or service, while indirect costs are not directly attributable to a single product or service, such as overhead expenses.

Business Combination

A transaction or other event in which an acquirer gains control over one or more businesses, which can include mergers, acquisitions, and consolidations.

Stockholders' Equity

The ownership interest of shareholders in a corporation, represented by the company's assets minus its liabilities.