You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. Average Return Standard Deviation Beta

Fund A 24 % 30 % 1.5

Fund B 12 % 10 % 0.5

Fund C 22 % 20 % 1.0

S&P 500 18 % 16 % 1.0

The fund with the highest Sharpe measure is:

a. Fund A.

b. Fund B.

c. Fund C.

d. Funds A and B (tied for highest).

e. Funds A and C (tied for highest).

Question

Hudson Mcclain

Mathematics

3 November, 01:04

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. Average Return Standard Deviation Beta

Fund A 24 % 30 % 1.5

Fund B 12 % 10 % 0.5

Fund C 22 % 20 % 1.0

S&P 500 18 % 16 % 1.0

The fund with the highest Sharpe measure is:

a. Fund A.

b. Fund B.

c. Fund C.

d. Funds A and B (tied for highest).

e. Funds A and C (tied for highest).

+5

Answers (1)

Know the Answer?

Andre Cowan · Answer 1

The correct option based on the below computation of Sharpe ratio for all funds is option C, Fund C.

Step-by-step explanation:

Sharpe ratio = (Average return of the fund-risk free rate of return) / standard deviation of the fund

Risk free rate of return is 6%

Fund A:

Sharpe ratio = (24%-6%) / 30%=0.6

Fund B:

Sharpe ratio = (12%-6%) / 10%=0.6

Fund C:

Sharpe ratio = (22%-6%) / 20%=0.8

Fund has a sharpe ratio of 0.8, unlike funds A& B that have a ratio of 0.6 each

In other words option C is correct