1 - Suppose that you are managing three security portfolio funds. The risk-free
ID: 2802246 • Letter: 1
Question
1 - Suppose that you are managing three security portfolio funds. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below
Fund
Average Return
Standard Deviation
Beta
A
15%
20%
0.8
B
20%
30%
1.2
S&P 500 Index
12%
18%
Risk-free Asset
3%
Compute the Sharpe ratio of each fund. Based on the Sharpe ratios, determine which fund performed the best risk-adjusted return
Fund
Average Return
Standard Deviation
Beta
A
15%
20%
0.8
B
20%
30%
1.2
S&P 500 Index
12%
18%
Risk-free Asset
3%
Explanation / Answer
Sharpe ratio=expected return-Risk free rate/standard deviation Risk adjusted return/Beta Fund A 0.6 15 Fund B 0.57 14.17 Fund A (15-3)/20 (15-3)/0.8 Fund B (20-3)/30 (20-3)/1.2 Fund A is Better since it has higher sharpe ratio Fund A is also better since it has higher beta adjusted return
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