Question

You want to evaluate three mutual funds. The risk-free return during the sample period is The average returns, standard deviations, and betas for the three funds are given below. 5%. as are the data for the S&P 500 Index.

Fund Avg Std Dev Beta
A 13.6% 40% 1.1
B 13.1% 25% 1.0
C 12.4% 30% 1.3
S&P 500 12.0% 15% 1.0

You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is.

a. fund A
b. fund B
c. fund C
d. The answer cannot be determined from the information given.

Answer 1

b. fund B

Step-by-step explanation:

The computation is shown below;

For fund A

= (Return - risk free rate) ÷ (standard deviation)

= (13.6% - 6%) ÷ 40%

= 7.6% ÷ 40%

= 0.19

For fund B

= Return - risk free rate ÷ standard deviation

= 13.1% - 6% ÷ 25%

= 7.1% ÷ 25%

= 0.284

For fund C = Return - Risk free rate ÷ standard deviation

= 12.4% - 6% ÷ 30%

= 6.4% ÷ 30%

= 0.213

So here the highest sharpe ratio is of fund B