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1.
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.
2.
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.
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.
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.
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.