Question

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 6%. The probability distribution of the risky funds is as follows:

	Expected Return			Standard Deviation
Stock fund (S)		17	%		38	%
Bond fund (B)		12			17

The correlation between the fund returns is 0.13.

What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

Sharpe ratio           

Answer 1

Here the risk free rate is 6% , the rate for the T-bill money market fund.

Sharpe ratio formula :

(Rp - Rf) op

where Rp is the return on particular fund or particular portfolio

Rf is the risk free rate , in this case it is 6%

sigma(p) is the standard deviation for the given fund or portfolio.

  

Sharpe ratio for stock fund (S): (17%-6%)/38% = 0.2895

Sharpe ratio for Bond fund (B) : (12%-6%)/17% = 0.3529

Hence the sharpe ratio for best feasible CAl is for Bond fund (B) 0.3529