Question 1
Multiple ChoiceAn investor is analyzing the returns of three mutual funds. Return information is provided in the table below:
Returns on Mutual Funds
Fund | Time Since Inception | Return Since Inception (%)
A | 100 days | 3.90
B | 6 weeks | 1.60
C | 14 months | 15.20
Explanation
To annualize returns, we use the formula:
Annualized Return = (1+R)^{(365/n)}−1, where n is the number of days since inception.
Fund A: (1+0.039)^{(365/100)}−1
Fund B: (1+0.016)^{(365/42)}−1
Fund C: (1+0.152)^{(365/426)}−1
Even though Fund B has the smallest raw return, it compounds to the highest annualized return when accounting for the shorter holding period.