Explanation:
To determine which fund is most appropriate for investment, the Sharpe ratio of the three funds is calculated as follows:
Fund A =
Fund B =
Fund C =
Fund A has the highest Sharpe ratio, which means that it will enhance risk-adjusted performance. As a result, it is the most suitable from an investment perspective.
Section: Foundations of Risk Management
Chapter: Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)
Learning objective: Calculate, compare, and interpret the following performance measures: the Sharpe performance index, the Treynor performance index, the Jensen performance index, the tracking error, information ratio, and Sortino ratio.
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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?
A
Fund A
B
Fund B
C
Fund C
D
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