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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.
What is alpha?
The difference between a fund's expected returns based on its beta and its actual returns.
3.
A fund's alpha is dependent on the legitimacy of its beta measurement.
True. After all, it measures performance relative to beta.
4.
Which measurement is most useful to investors?
A Sharpe ratio of 1.7 for a fund with a standard deviation of 12%. Alphas aren't meaningful unless the fund's R-squared is greater than 75. Sharpe ratios, meanwhile, are always useful, because they involve standard deviations rather than betas.
5.
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.
