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# You recently graduated from university, and your job search led you to Coles Group Limited. Since...

1. A measure of risk-adjusted performance that is often used in practice is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The standard deviations and returns for the funds over the past 10 years are listed below. Assuming a risk-free rate of 4%, calculate the Sharpe ratio for each of these. In broad terms, what do you suppose the Sharpe ratio is intended to measure?
 DOWN UNDER FUND TEN-YEAR ANNUAL STANDARD DEVIATION All Ordinaries Index Fund 9.15% 19.35 Property Trust Fund 14.05 26.82 Bond Fund 9.53 23.82 Money Market Fund 8.73 11.45

Sharpe Ratio developed by William F Sharpe, Nobel Laureate, to understand returns of an investment over the risks (standard deviation). The formula for the same is

So the Sharpe Ratio for these funds is calculated as follows

 A B C D=B-C E=D/A FUND Standard Deviation Ten Year Return (p.a) Risk Free Rate Risk Premium Sharpe Ratio All Ordinaries Index Fund 19.35 9.15% 4% 5.15% 0.2661 Property Trust Fund 26.82 14.05% 4% 10.05% 0.3747 Bond Fund 23.82 9.53% 4% 5.53% 0.0419 Money Market Fund 11.45 8.73% 4% 4.73% 0.4131

Higher sharpe ratio, indicates higher risk premium over less risk. So, Money Market Fund seems better on account of Sharpe Ratio. But there are also many other methods to determine a better fund.

Good Luck

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