You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 4%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{cc}
&\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\
\text { Fund A } &18\%&38\%&1.6\
\text {Fund B } &15\%&27\%&1.3\
\text { Fund C} &11\%&24\%&1.0\
\text {S\&P 500}&10\%&22\%&1.0
\end{array}$

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

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 4%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{cc}
  &\text {Average ReturnResidual   } &\text { Standard Deviation  }&\text { Beta }\
 \text { Fund A } &18\%&38\%&1.6\
 \text {Fund B  } &15\%&27\%&1.3\
 \text { Fund C} &11\%&24\%&1.0\
\text {S\&P 500}&10\%&22\%&1.0
\end{array}$

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).

Quizplus · Accepted Answer

The Sharpe ratio is calculated as $(\text{Return of the portfolio} - \text{Risk-free rate}) / \text{Standard deviation of the portfolio's excess return}$. For each fund, it is:- Fund A: $(18\% - 4\%) / 38\% = 0.3684$- Fund B: $(15\% - 4\%) / 27\% = 0.4074$- Fund C: $(11\% - 4\%) / 24\% = 0.2917$Fund B has the highest Sharpe ratio, indicating the best risk-adjusted return.

You Want to Evaluate Three Mutual Funds Using the Sharpe