You Want to Evaluate Three Mutual Funds Using the Sharpe

question 5

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 6%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index.

The fund 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:

Straight-Line Depreciation

A manner for spreading out the cost of a tangible asset across its useful life in regular yearly installments.

Income Taxes

Income taxes are taxes imposed by governments on the income generated by businesses and individuals within their jurisdiction.

Operating Cash Inflow

Money generated from a company's regular business operations, indicating its capacity to maintain and grow operations.

Internal Rate of Return

A metric used in financial analysis to estimate the profitability of potential investments, calculated as the rate of return that sets the net present value of all cash flows from the investment equal to zero.