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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.
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.
3.
A high alpha for a fund proves good management skill on the part of the fund's management.
False. Alpha cannot prove such skill, though it can be interpreted that way.
4.
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.
5.
What allows us to use the Sharpe ratio to compare risk-adjusted returns of funds in different categories?
Its use of standard deviation. Standard deviation is calculated the exact same way for any type of fund, be it stock or bond.
