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Funds 205: Gauging Risk and Return Together: Alpha and the Sharpe Ratio

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1.
Which measurement is most useful to investors?
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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.
The higher a fund's Sharpe ratio, _______.
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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.
Alpha _______ distinguish between underperformance caused by incompetence and underperformance caused by fees.
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Does not. Alpha does not distinguish between these two.
4.
A fund with a negative alpha _______.
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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.
5.
A high alpha for a fund proves good management skill on the part of the fund's management.
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False. Alpha cannot prove such skill, though it can be interpreted that way.