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1.
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.
2.
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.
3.
What is alpha?
The difference between a fund's expected returns based on its beta and its actual returns.
4.
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.
5.
Alpha _______ distinguish between underperformance caused by incompetence and underperformance caused by fees.
Does not. Alpha does not distinguish between these two.
