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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 higher a fund's Sharpe ratio, _______.
The greater its returns given the amount of risk it's taking on. The Sharpe ratio is based on the relationship between a fund's risk as measured by standard deviation and its returns.
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.
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.
A fund with a negative alpha _______.
Has returned less than you'd expect, given its beta. Alpha hinges on beta, not standard deviation. Funds with positive alphas have returned more than their betas suggested they would return.
