The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%. You wish to evaluate the three mutual funds using the Sharpe measure for performance evaluation. The fund with the highest Sharpe measure of performance is ________.
A)Fund A
B)Fund B
C)Fund C
D)indeterminable

Question

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%.  You wish to evaluate the three mutual funds using the Sharpe measure for performance evaluation. The fund with the highest Sharpe measure of performance is ________.
A)Fund A 
B)Fund B 
C)Fund C 
D)indeterminable

Quizplus · Accepted Answer

The Sharpe measure is calculated as (Rp - Rf) / σp, where Rp is the expected return of the portfolio, Rf is the risk-free rate, and σp is the standard deviation of the portfolio.

For Fund A: 
Sharpe measure = (10% - 6%) / 8% = 0.50

For Fund B: 
Sharpe measure = (12% - 6%) / 10% = 0.60

For Fund C: 
Sharpe measure = (14% - 6%) / 12% = 0.67

Therefore, Fund C has the highest Sharpe measure and is the best choice.

The Average Returns, Standard Deviations and Betas for Three Funds