Question

1. Mutual fund A had an annual return of 10% and the annual standard deviation of its excess return is 30%. The average yield on Treasury bills during the same period is 3%. The excess return on mutual fund B had a standard deviation of 23%. What average return would give fund B the same Sharpe ratio as fund A? Enter your answer as a decimal (not percentage).

2. A stock has an annual return of 10% and a standard deviation of 39%. What is the 95% VaR? Use Excel and =NORM.INV() to solve this problem. The exam will provide all the information you need without using Excel. Enter your answer as a decimal, not a percentage.

Answer 1

1. Shape Ratio of Mutual Fund A = (Return - Risk Free Rate)/Standard Deviation = (10%-3%)/30% =7/30
Since Sharpe ratio of A and B are same
. Shape Ratio of Mutual Fund B  = (Return - Risk Free Rate)/Standard Deviation = (Return -3%)/25% = 7/30
Return = 25%*7/30 + 3% = 8.83%

2.
95% Var Using Excel  = NORM.INV(95%,10%,39%) = 0.74 ( Norm.INV(Probability, means, standard deviation)

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