Question

A mutual fund has earned annual returns of 11%, -5% and 15% 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

Answer = a) 0.47

Notes:

1. Average Return = Sum of returns / Period

= (11%-5%+15%)/3

= 7%

2. Standard Deviation:

Probable Return	Deviation ( Probable Return- Expected Return)	Deviation Squared
11	4.000	16
-5	-12.000	144
15	8.000	64
	Deviation Squared Total	224

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

=[224/2]^(1/2)

=10.5830052442584 %

3. Sharpe Ratio = (Average return - risk free rate) / Standard Deviation

= [ 7%-2%] /10.5830052442584 %

= 0.47