Financial Risk Manager Part 1

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Explanation:

The Sharpe ratio is calculated as the excess return of the portfolio over the risk-free rate divided by its standard deviation. The formula is: Sharpe Ratio = $(R_p - R_f) / \sigma_p$

Given $R_f = 2\%$ :

Fund A Sharpe Ratio = $(15\% - 2\%) / 20\% = 13\% / 20\% = 0.65$
Fund B Sharpe Ratio = $(22\% - 2\%) / 36\% = 20\% / 36\% \approx 0.556$
Fund C Sharpe Ratio = $(9\% - 2\%) / 15\% = 7\% / 15\% \approx 0.467$

Fund A has the highest Sharpe ratio, meaning it generates the most excess return per unit of total risk. Hence, it is the most appropriate fund from an investment perspective according to the Sharpe ratio.

Explanation:

The Sharpe ratio is calculated as the excess return of the portfolio over the risk-free rate divided by its standard deviation. The formula is: Sharpe Ratio = $(R_p - R_f) / \sigma_p$

Given $R_f = 2\%$ :

Fund A Sharpe Ratio = $(15\% - 2\%) / 20\% = 13\% / 20\% = 0.65$
Fund B Sharpe Ratio = $(22\% - 2\%) / 36\% = 20\% / 36\% \approx 0.556$
Fund C Sharpe Ratio = $(9\% - 2\%) / 15\% = 7\% / 15\% \approx 0.467$

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Q.40 The exhibit below summarizes risk and return for three market-neutral hedge funds in Canada:

Exhibit Risk, Return and Fee Data for Three Market-Neutral Hedge Funds

Fund A Fund B Fund C
Annualized return 15% 22% 9%
Annualized standard deviation 20% 36% 15%

If the risk-free rate in Canada is 2%, which of these funds is most appropriate from an investment perspective, according to the Sharpe ratio?

	Fund A	Fund B	Fund C
Annualized return	15%	22%	9%
Annualized standard deviation	20%	36%	15%

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TTitan

Last updated: May 18, 2026 at 04:39

Fund A

Fund B

Fund C

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