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You are given some information about two mutual funds: Fidelity Magellan (FMAGX) and T Rowe Price...

You are given some information about two mutual funds: Fidelity Magellan (FMAGX) and T Rowe Price Health Sciences Fund (PRHSX). Fund Average return Standard deviation Beta FMAGX 1% 2% 0.5 PRHSX 1.5% 2.5% 0.8 The S&P500 made an average of 2% per month over the same period. The risk free rate was zero throughout. (a) Calculate the Sharpe ratio and alpha of each fund (b) Assume that each fund will continue to have the same Sharpe ratio and alpha going forward. Which of the two funds will you buy if you intend to hold ONLY the fund and the risk free asset? (c) Assume that each fund will continue to have the same Sharpe ratio and alpha going forward. Which fund will you buy if you intend to hold the fund as a small part of a large portfolio of other risky assets?

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Answer #1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

b. Since PRSHX has a higher Sharpe ratio and Higher Alpha. It will be chosen going forward.

c. Since FMAGX has a lower correlation of 0.5, it will be chosen because it will provide a benefit of diversification.

Because it is a small portion of a Portfolio and it's Sharpe ratio, Alpha is not very much different from PRSHX, it can be ignored.

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