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Funds 205: Gauging Risk and Return Together: Alpha and the Sharpe Ratio

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1.
Standard deviation lets us use the Sharpe ratio to compare risk-adjusted returns of funds in different categories.
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True. Standard deviation is calculated the exact same way for any type of fund, be it stock or bond.
2.
Alpha _______ distinguish between underperformance caused by incompetence and underperformance caused by fees.
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Does not. Alpha does not distinguish between these two.
3.
The Sharpe ratio uses _______ to measure a fund's risk-adjusted returns.
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Standard deviation. Because it uses standard deviation, the Sharpe ratio can be used to compare risk-adjusted returns across all fund categories.
4.
If a fund returned 30% with a standard deviation of 15%, and the 90-day Treasury bill returned 3%, what's the fund's Sharpe ratio?
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1.8. To calculate Sharpe ratio, subtract the T-bill return from the fund's return, and divide by standard deviation.
5.
What is alpha?
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The difference between a fund's expected returns based on its beta and its actual returns.