If a fund posted a 50% return last year, what is the appropriate way to evaluate it?

• A. It guarantees similar returns next year
• B. Past performance is irrelevant to evaluation
• C. Past performance does not guarantee future results; compare to the S&P and understand how the return was achieved
• D. It must be avoided due to risk

Answer: (C)

Past performance isn’t predictive of future results. A 50% return tells you what happened, but not whether it will happen again. The best way to evaluate is to see how the fund performed relative to a relevant benchmark, like the S&P, to determine if the manager added value beyond the broad market. Equally important is understanding how that return was achieved—what drove the gains, what risks were taken, and what fees were paid—so you can assess sustainability and risk-adjusted performance. This combination—benchmark comparison and return attribution—best informs whether the impressive year is likely to repeat.