The marketing literature of many mutual funds often trumpets the historical performance of the fund. Typically, returns are compared to the S&P 500. The Vanguard Index 500 mutual fund (ticker = VFINX) matches this index. But these returns are almost never interpreted in terms of return per unit of risk, for example, using the reward-to-variability ratio introduced in Chapter 6. Compare the reward-to-variability ratio of VFINX to five randomly selected mutual funds as a casual test of market efficiency.

1. Go to www.morningstar.com and retrieve five years of return data. Calculate the average return and standard deviation of the mutual fund.
2. From the main page at www.morningstar.com search for the Fidelity family of funds. Choose five general-purpose equity mutual funds (i.e., funds that do not focus on very narrow sectors of the market) from this list and retrieve the same five years of data.
3. Compute the excess return per standard deviation for all six mutual funds. (You can get monthly T-bill rates to calculate excess returns from the Federal Reserve Web site at www.federalreserve.gov/releases/h15/data.htm).
4. Compare performance and assess the ability of these mutual funds to outperform the VFINX on a risk-adjusted basis.

Go to www.morningstar.com. Halfway down the page select "Top Performing Funds." From the pull-down menu, change the ranking criteria to total 10-year return. A list of the long-term winners will appear. You can click on the name of the fund and a more detailed report will appear. The risk measures are available on the left side of the screen. View that information for each of the top three long-term winners.

1. Which, if any, of the funds outperformed the market for its level of risk?
2. Which fund had the highest level of risk-adjusted performance?