You Want to Evaluate Three Mutual Funds Using the Sharpe

question 23

Multiple Choice

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 5%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\text { S\&P 500 } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\23\% \\20\% \\19\% \\18\%\end{array}\begin{array}{lll}\text {Regidual}\\\text { Standand } \\\text { Deviation.} \\\text {30\% } \\\text {19\% } \\\text { 17\% } \\15\%\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 1.3 } \\\text { 1.2 } \\\text { 1.1 } \\1.0\end{array}\end{array}$
The investment with the highest Sharpe measure is

• A) Fund A.
• B) Fund B.
• C) Fund C.
• D) Funds A and B (tied for highest).
• E) Funds A and C (tied for highest).

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Definitions:

Spot Price

The current market price at which an asset can be bought or sold for immediate delivery.

Bushel

A unit of volume that is used in agriculture, specifically in the United States, for measuring quantities of grain.

Treasury Bonds

Long-term government debt securities with a fixed interest rate, considered low-risk investments.

Interest Rate Futures

Financial derivatives contracts that lock in the future delivery of an asset based on interest rates, commonly used for hedging and speculating on future interest rate movements.