A measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is
Question:
A measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The standard deviation and return of the funds over the past 10 years are listed below. Calculate the Sharpe ratio for each of these funds. Assume that the expected return and standard deviation of the company stock will be 15 percent and 65 percent, respectively. Calculate the Sharpe ratio for the company stock. How appropriate is the Sharpe ratio for these assets? When would you use the Sharpe ratio?
10-YEAR ANNUAL RETURN | STANDARD DEVIATION | |
Bledsoe S&P 500 Index Fund | 10.15% | 23.85% |
Bledsoe Small Cap Fund | 14.83 | 29.62 |
Bledsoe Large Company Stock Fund | 11.08 | 26.13 |
Bledsoe Bond Fund | 8.15 | 10.34 |
Sharpe Ratio measures the risk premium of the portfolio relative to the total amount of risk in the portfolio. The risk premium is the difference between the portfolio’s average return and the risk free rate of return. The standard deviation of the portfolio indicates the risk.
Valuation The Art and Science of Corporate Investment Decisions
ISBN: 978-0133479522
3rd edition
Authors: Sheridan Titman, John D. Martin