Question

Suppose that you have the following information about four mutual funds. Each is composed of some mix of stocks and bonds.

Name of fund	Sharpe ratio
Admiral Fund	0.1073
Bolo Fund	0.2628
Carocol Fund	0.9252
Dresner Fund	0.5599

Suppose that you are limited to these four mutual funds. Among these four, which one is optimal (or, at least, the most optimal)?

Answer 1

Sharpe Ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.

Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is defined as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment.

Name of fund	Sharpe ratio	Preference Ranking
Admiral Fund	0.1073	4
Bolo Fund	0.2628	3
Carocol Fund	0.9252	1
Dresner Fund	0.5599	2

As Sharpe Ration gives the Risk adjusted return, the Mutual fund with Higher Sharpe Rationwill be more Optiomal.

From the given Funds,  Carocol Fund has the higher Sharpe Ratio and it should be selected as it is relatively most optimal among the given 4 Funds.