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

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1.
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.
2.
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.
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?
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1.8. To calculate Sharpe ratio, subtract the T-bill return from the fund's return, and divide by standard deviation.
4.
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.
5.
What is alpha?
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The difference between a fund's expected returns based on its beta and its actual returns.