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

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

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.