Question

John is a portfolio manager of a mutual fund. Hisinvestment policy is investing up to 50% of the portfolio in small cap stocks and the rest in high-risk bonds. After one year, Johnhad a total return of 15% while theS&P Small Cap 600 Index increased by 5%. Therefore, John advertised that his excess returnover thebenchmark is 10%.Explain your opinion about John’s performance and the benchmark(8points

Answer 1

The performance of John and the benchmark is not correct. since John's portfolio consists of high risk binds and small cap stocks, it is not seen as a good practice in making a portfolio of small cap stocks as a benchmark

Step-by-step explanation:

Solution

From the given question, my opinion towards the performance of John's is that he's claim is wrong.

The benchmark portfolio should be a good approximation of the filed/sector of your portfolio. Since the John's portfolio comprises of small cap stocks and high-risk bonds, it is not a good standard practice to make a portfolio of small cap stocks as benchmark.