You Want to Evaluate Three Mutual Funds Using the Jensen

question 10

Multiple Choice

You want to evaluate three mutual funds using the Jensen measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 18%. The average returns, standard deviations, and betas for the three funds are given below. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\17.6\% \\17.5\% \\17.4\% \\\end{array}\begin{array}{lll}\text {Residual } \\\text { Standand } \\\text { Deviation.} \\\text {10\% } \\\text {20\% } \\\text { 30\% } \\\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 1.2 } \\\text { 1.0 } \\\text { 0.8 } \\\end{array}\end{array}$
The fund with the highest Jensen 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:

Corporation's Name

The legal name under which a corporation is registered to conduct business, distinct from its owners and shielded by the corporate veil.

Shareholder

An individual or entity that owns a share or shares of stock in a corporation, thus having an interest in its performance and governance.

Stock

Represents ownership in a corporation, entitling the holder to a share of the company's profits and assets.

Right Of First Refusal

A contractual right that gives its holder the option to enter a business transaction with the owner of something, before the owner is entitled to enter into that transaction with a third party.