Question

A measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The standard deviations and returns of the funds over the past 10 years are listed here. Calculate the Sharpe ratio for each of these funds. Assume that the expected return and standard deviation of the company stock will be 16 percent and 58 percent. Calculate the Sharpe ratio for the company stock. How appropriate is the Sharpe ratio for these assets? When would you use the Sharpe ratio?
10-YEAR ANNUAL RETURN STANDARD DEVIATION
Bledsoe S&P 500 Index Fund 10.15% 23.85%
Bledsoe Small Cap Fund 14.83 29.62
Bledsoe Large Company Stock Fund 11.08 26.13
Bledsoe Bond Fund 8.15 10.34

Answer 1

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 = $\dfrac{R_p-R_f}{\sigma _p}$

where;

$R_p$ = return of portfolio asset

From the given information, the risk-free rate $R_f$ wasn't given, So let's assume that the risk-free rate  $R_f$ = 3.2%

∴

For Bledsoe S&P 500 Index fund

Sharpe Ratio = $\dfrac{10.15\%-3.2\%}{23.85\%}$

= 0.2914

Small-cap Funs Sharpe Ratio = $\dfrac{14.83\%-3.2\%}{29.62\%}$

= 0.3926

Large company stock Fund Sharpe Ratio = $\dfrac{11.08\%-3.2\%}{26.13\%}$

= 0.3016

Bond Fund Sharpe Ratio = $\dfrac{8.15\%-3.2\%}{26.13\%}$

= 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.