Answer:
Explanation:
Sharpe ratio is the measure of the excess return per unit of risk in an investment asset or trading strategy.
To calculate the Sharpe of the following annual return using the formula:
Sharpe ratio =
where;
= return of portfolio asset
From the given information, the risk-free rate wasn't given, So let's assume that the risk-free rate
= 3.2%
∴
For Bledsoe S&P 500 Index fund
Sharpe Ratio =
= 0.2914
Small-cap Funs Sharpe Ratio =
= 0.3926
Large company stock Fund Sharpe Ratio =
= 0.3016
Bond Fund Sharpe Ratio =
= 0.1894
10-Year Standard Sharpe Ratio
Annual Return deviation
Bledsoe S&P - 10.15% 23.85% 0.2914
500 Index fund
Small Cap Fund 14.83% 29.62% 0.3926
Large Company - 11.08% 26.13% 0.3016
Stock Fund
Bond Fund 8.15% 10.34% 0.1894
As depicted in the table above, the small-cap fund has the highest return per unit of risk, and company stock has the lowest return per unit of risk.
The ratio is clearly appropriate for the index funds. The whole risk is reflected by the Sharpe ratio, which is believed to be completely diversified, and systemic risk is reduced.
It is good for other stock funds since the overall risk is crucial for small investors who cannot readily diversify.
It is also acceptable to invest in bond funds since we may compare their Sharpe ratio to stock funds and take a financial investment decision.
We would take and make use of the Sharpe ratio when:
- Comparing various assets with differing risks, then the Sharpe ratio would be applied to alter the "unit."
- We are concerned about any type of volatility.
