A Firm That Evaluates Portfolios Uses the Sharpe Approach to Measuring

question 27

Essay

A firm that evaluates portfolios uses the Sharpe approach to measuring performance.How would it rank these three portfolios? $$\begin{array} { | l | r | r | r | } \hline & \text { Total } & \text { Risk } & \\\hline & \text { Portfolio } & \text { Free } & \text { Standard } \\\hline & \underline { \text { Return } } & \text { Rate } & \text { Deviation } \\\hline \text { Bemis Money Managers } & 10 \% & 6 \% & 16 \% \\\hline \text { Fiddler Investment Company } & 15 \% & 6 \% & 20 \% \\\hline \text { Memory Group } & 8 \% & 6 \% & 11 \% \\\hline\end{array}$$ Sharpe Measure $=$ $\frac{\text {Total Portfolio Return - Risk Free Rate }}{\text { Portfolio Standard Deviation}}$ What percent of funds under management should be invested in stocks,bonds,and the like?

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Definitions:

American Revolution

The period of political and military action (1775-1783) during which the thirteen American colonies won independence from Great Britain, leading to the establishment of the United States of America.

Labor

The work performed by individuals that contributes to the production of goods and services, typically rewarded with wages.

Capital

Financial assets or the financial value of assets, such as cash and securities, or fixed assets like machinery and buildings, used in producing goods and services.

American Economy

The economic system of the United States characterized by a mixture of private and public enterprises, a high level of technological innovation, and a relatively high GDP per capita.