A measure of risk-adjusted performance that is often used 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 of the funds over the past 10 years are listed here. Calculate the Sharpe ratio for each of these funds. Assume that the expected return and standard deviation of the company stock will be 16 percent and 70 percent, respectively. Calculate the Sharpe ratio for the company stock. How appropriate is the Sharpe ratio for these assets? When would you use the Sharpe ratio?
| 10-Year Annual Return | Standard Deviation |
Bledsoe S&P 500 Index Fund | 8.45% | 21.85% |
Bledsoe Small-Cap Fund | 13.45 | 24.83 |
Bledsoe Large-Company Stock Fund | 8.62 | 22.93 |
Bledsoe Bond Fund | 6.25 | 9.20 |
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