Performance Appraisal of Equity Fund

Hard Performance Evaluation Performance Appraisal

ABC Investment Management, a firm that specializes in developing clients' investment portfolios, has recently completed a performance appraisal of its equity fund. The fund manager reported an alpha of 2% over the past year against a benchmark consisting of the S&P 500. The firm's investment policy states that the fund should have a minimum tracking error of 5% when compared to the benchmark. Additionally, the fund manager indicated that the beta of the portfolio is 1.2. The firm is concerned about the performance sustainability and risk-adjusted returns of the fund.

Which of the following statements best assesses the adequacy of the performance appraisal of ABC Investment Management's equity fund?

The alpha should be adjusted for the fund's higher beta and lower tracking error evaluation limits to determine the true performance.

Reporting only the alpha is sufficient for evaluating the fund's performance as it indicates excess return over the benchmark.

To adequately assess performance, the appraisal should consider both alpha and the risk implied by tracking error relative to the benchmark.

Hint

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