Question

Compute the Sharpe ratio of the AlphaFund mutual fund using the following information: AlphaFund expected return = 7%, expected market return = 9.5%, expected risk-free return = 1%, expected standard deviation of AlphaFund risk premium = 14.2%, predicted beta of AlphaFund = 1.28

Answer 1

Sharpe Ratio: Also called Reward to varriability ratio used to measure the excess return per unit of risk. Higher the sharpe ratio better the firms position. It also used to measure the performance of fund manager where we would focus on actual returns rather than expected returns and the risk they took to earn such returns.

Sharpe Ratio is given by:

Here: R_p is the expected return on portfolio

R_f is the risk free returns

   is the standard deviation of the risk premium

Therefore :

%

Side Note: Here in this qustion other information such as expected market return and predicted beta is given. These information are useful to calculate other ratios such as Treynor's Ratio (Rp-Rf/) or Jensen Alpha (Rp-Re). Sharpe Ratio uses only three component by which the above quetion is solved.

Please Upvote.