William Sharpe created a metric for fund performance, which enables the ranking of funds on a risk-adjusted basis. This measure is based on the comparison of “excess return” per unit of risk, risk being measure4d by standard deviation. Excess return is defined as the actual return of the fund less the risk free rate. The return on the 90-day treasury bill of the government is taken as the risk-free reat.using the figures as in the example above, and assuming a risk free of 7%. We will be able to compute the Sharpe ratio as follows:
Benchmark:
(12 – 7)/9
0.55
Mutual fund:
(16 – 7) 11
0.75
Since the fund delivering a superior return compared to the benchmark, it is ranked as an out-performer.
Benchmark:
(12 – 7)/9
0.55
Mutual fund:
(16 – 7) 11
0.75
Since the fund delivering a superior return compared to the benchmark, it is ranked as an out-performer.
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