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What allows us to use the Sharpe ratio to compare risk-adjusted returns of funds in different categories?

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Its use of standard deviation

Its use of beta

Both of the above

Neither of the above

Its use of standard deviation. Standard deviation is calculated the exact same way for any type of fund, be it stock or bond.

Alpha _______ distinguish between underperformance caused by incompetence and underperformance caused by fees.

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Does

Does not

Usually does

Does not. Alpha does not distinguish between these two.

What is alpha?

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The difference between a fund's expected returns based on its beta and its actual returns

The degree to which a fund's returns move up or down given a gain or loss of its benchmark

The ratio of price to earnings

The difference between a fund's expected returns based on its beta and its actual returns.

A fund's alpha is dependent on the legitimacy of its beta measurement.

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True

False

True. After all, it measures performance relative to beta.

The Sharpe ratio uses _______ to measure a fund's risk-adjusted returns.

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Beta

Standard deviation

Alpha

Standard deviation. Because it uses standard deviation, the Sharpe ratio can be used to compare risk-adjusted returns across all fund categories.

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