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Sharp Ratio

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Submitted By homiera
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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 the excess return above or below the security market line. It can be interpreted as a measure of portfolio’s excess return over the market. A positive alpha shows the portfolio has a relatively high return given its level of systematic risk. Figure 2 below shows that the highest alpha belongs to WVF.

Figure 2
In both ranking Wallflower Fund is showing the best return. The same reasoning was established when assessing the portfolio based on the average return, beta and stdev in the past. 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

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