MAT 117 Chapter Notes - Chapter 3: Uniform 1 K2 Polytope, Sharpe Ratio, Standard Deviation
8 Oct 2016
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Mean-variance analysis: postulates that the performance of an asset is measured by its rate of return, & this rate of return is evaluated in terms of its reward (mean) & risk (variance). In genera investments w/ higher average returns are also associated w/ higher risk. Sharpe ratio: measures the extra reward per unit of risk; evaluates the relationship between the return & risk; has become the industry standard for comparison between funds. Computed as: x = mean return for the investment. Rf = mean return for a risk-free asset. Standard deviation for metal fund = 1,378. 61 = 37. 13. Standard deviation for income fund = 122. 48 = 11. 07. Sharpe ratio for the metal fund = 24. 65 - 2 / 37. 13 = 0. 61. Sharpe ratio for the income fund = 8. 51 - 2 / 11. 07 = 0. 59. Therefore, metals fund offered more reward per unit of risk compared to the income fund.
