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1.
Standard deviation lets us use the Sharpe ratio to compare risk-adjusted returns of funds in different categories.
True. Standard deviation is calculated the exact same way for any type of fund, be it stock or bond.
2.
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?
1.8. To calculate Sharpe ratio, subtract the T-bill return from the fund's return, and divide by standard deviation.
3.
Alpha _______ distinguish between underperformance caused by incompetence and underperformance caused by fees.
Does not. Alpha does not distinguish between these two.
4.
The Sharpe ratio uses _______ to measure a fund's risk-adjusted returns.
Standard deviation. Because it uses standard deviation, the Sharpe ratio can be used to compare risk-adjusted returns across all fund categories.
5.
Funds A, B, and C each return 15%, while the SP 500 returns 10%. Relative to the SP 500, which fund has the highest alpha?
Fund C, which has a beta of 0.8. With its beta, you'd expect Fund C to gain 8% (10% x 0.8 = 8%). It made almost twice that. Fund A should have gained 10%, so it earns a lower alpha than Fund C. Fund B should have returned 17%, so the fund has a negative alpha.
