likaiba

 

21、Which Sharpe ratio indicates that Fund One earned a return on investment that is greater than the risk taken by the fund?

A) 1.5.

B) 0.5.

C) 1.0.

D) 0.

likaiba

 

The correct answer is A

A Sharpe ratio of 1 indicates the risk and return of the investment are proportional, while a lower ratio indicates greater risk was taken and a higher ratio indicates less risk was taken to generate the return on investment.

 

likaiba

 

The correct answer is Dfficeffice" />

The Sharpe ratio is excess return (return ? Rf) per unit of risk (defined as the standard deviation of returns).

 

likaiba

 

18、Johnson Inc. manages a growth portfolio of equity securities that has had a mean monthly return of 1.4% and a standard deviation of returns of 10.8%. Smith Inc. manages a blended equity and fixed income portfolio that has had a mean monthly return of 1.2% and a standard deviation of returns of 6.8%. The mean monthly return on Treasury bills has been 0.3%. Which of the following statements is most accurate?

A) Based on the Sharpe ratio, the performance of the Johnson portfolio is preferable to the performance of the Smith portfolio.

B) The Johnson portfolio has greater excess return per unit of risk than the Smith portfolio.

C) The Sharpe ratio shows that the Johnson and Smith portfolios have exhibited the same risk-adjusted performance.

D) Based on the Sharpe ratio, the performance of the Smith portfolio is preferable to the performance of the Johnson portfolio.

likaiba

 

The correct answer is D

The Sharpe ratio for the Johnson portfolio is (1.4 - 0.3)/10.8 = 0.1019.

The Sharpe ratio for the Smith portfolio is (1.2 - 0.3)/6.8 = 0.1324.

The Smith portfolio has the higher Sharpe ratio, or greater excess return per unit of risk.

 

likaiba

 

19、A higher Sharpe ratio indicates:

A) a lower risk per unit of return.

B) greater diversification in the portfolio.

C) lower volatility of returns.

D) a higher excess return per unit of risk.

likaiba

 

The correct answer is D

The Sharpe ratio measures excess return per unit of risk. (4.56 – 0.42) / 3.56 = 1.16.

 

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17、Which of the following statements regarding the Sharpe ratio is most accurate? The Sharpe ratio measures:

A) excess return per unit of risk.

B) total return per unit of risk.

C) dispersion relative to the mean.

D) peakedness of a return distrubtion.

likaiba

 

The correct answer is A

The Sharpe ratio measures excess return per unit of risk. Remember that the numerator of the Sharpe ratio is (portfolio return ? risk free rate), hence the importance of excess return. Note that dispersion relative to the mean is the definition of the coefficient of variation, and the peakedness of a return distribution is measured by kurtosis.

 

likaiba

 

The correct answer is B

Treynor measure = Tj = (Rj – RF) / βj = (.12 - .0450) / 1.35 = 0.0556