Choose wisely. There is only one correct answer to each question.
0%
Keep studying!
Review your answers below to learn more.
1.
A fund's alpha is dependent on the legitimacy of its beta measurement.
True. After all, it measures performance relative to beta.
2.
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.
3.
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.
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.
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.
