The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk free return during the sample period is 6%.
-You wish to evaluate the three mutual funds using the Jensen measure for performance evaluation.The fund with the highest Jensen measure of performance is __________.
A) Fund A
B) Fund B
C) Fund C
D) S&P500

Question

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk free return during the sample period is 6%. 
-You wish to evaluate the three mutual funds using the Jensen measure for performance evaluation.The fund with the highest Jensen measure of performance is __________.
A) Fund A 
B) Fund B 
C) Fund C 
D) S&P500

Quizplus · Accepted Answer

To calculate the Jensen measure, we need to use the formula: Jensen Measure (J) = Actual Return - [Risk-free rate + Beta * (Market Return - Risk-free Rate)].

Calculating the Jensen measure for each of the funds and the S&P 500:
Jensen Measure for Fund A = 15% - [6% + 1.2 * (10% - 6%)] = 9.6%
Jensen Measure for Fund B = 18% - [6% + 1.5 * (10% - 6%)] = 12%
Jensen Measure for Fund C = 12% - [6% + 0.8 * (10% - 6%)] = 7.2%
Jensen Measure for S&P 500 = 10% - [6% + 1 * (10% - 6%)] = 8%

Therefore, Fund B has the highest Jensen measure of 12% and is the best choice.

The Average Returns, Standard Deviations and Betas for Three Funds