Question

A mutual fund has earned annual returns of 11%, -5% and 27% over the past three years. If the average risk-free rate during that time was 2% per year, what was this fund's Sharpe Ratio during that time period?

a) 0.47 b) 0.51 c) 0.53 d) 0.56 e) 0.58

Answer 1

Average Return = Sum of returns / Number of Periods

= (11%-5%+27%)/3

= 11%

Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared
11	- .0	0
-5	-16.000	256
27	16.000	256
	Deviation Squared Total	512

standard deviation = [Sum of Deviation Squared / (Number of Periods -1)]^(1/2)

= [512/(3-1)]^(1/2)

= 16%

Sharpe Ratio = (Average Return - risk free rate) / Standard Deviation

= (11%-2%)/16%

= 0.56

Answer =  d) 0.56