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Sharp Ratio Essay

541 words - 3 pages

Soundsleep Assignment 2

Subject: Sound sheep funds ranking

Per your request, I have compared the five funds based on the sharpe ratio, and Jensen alpha calculations. I also compared the result to the earlier analysis done based on average return, standard deviation and beta.
Sharpe ratio, measures investment performance of the portfolio compared to risk taken. It’s most appropriate to use when evaluating diversified portfolios. Sharpe ratio penalizes non-diversified portfolios by also taking into account unsystematic risk. The high sharpe ratio represents the better performance for taking on additional risk. Wallflower Value Fund (WVF) shows the highest performance. The lowest is Mega Multinational Fund (MMF) (figure 1).

Figure 1
Jensen's alpha is ...view middle of the document...

The beta of the fund is close to 1.0, the slope beta is slightly above 1.0, the Stdev relative to the average return is reasonable. Base on the alpha and sharpe’s calculation, the fund is receiving a high return while managing the risk. If we agree that the past performance will be a good indicator that the fund might manage the same performance in the future, the WVF is the best performance fund.
Mega Multinational fund (MMF) and Fast Track Fund (FTF) are the lowest performed funds based on the lowest sharpe ratio and alpha accordingly. The average return and Stdev for both of these funds showed the same result. The level of risk is too high for the return that is offered. Small move in the market or systematic risk can cause a huge lost for these two funds.
A risk averse investor might mix Soundsleep S&P 500 and Wallflower funds to manger the risk better. The weight of the investment of each fund can be measured base on the risk free rate and Capital Asset Pricing Model (CAMP) return.
Reviewing the funds I did not considered the objectives of each fund. I concentrated on the risk and performance of the fund for the level of the risk and volatility. I did consider that all funds have a positive correlation and are moving in the same direction. There is a relationship between the average return earned on asset and the volatility of the asset, the higher volatility will have a higher return. Risks that cannot be diversified are important. The return on the stock should be proportional to the part of the stock which cannot be eliminated by holding the diversified portfolio. The CAMP beta will calculate the level of risks that cannot be diversified away and will help to assess how much each fund should weight within the portfolio. Figure 2 above shows all data calculated for these funds.

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