aa.9 A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the thirdis a money market fund that provides a safe return of 7%. The characteristics of the risky funds are as follows:Stock fund (S)Bond fund (B)ExpectedReturn22%12StandardDeviation32%19The correlation between the fund returns is 0.11.Sharpe ratioWhat is the Sharpe ratio of the best feasible CAL?Note: Do not round intermediate calculations. Enter your answer as a decimal rounded to 4 places.

The Sharpe ratio is used to compare the return of an investment with its risk. It's a mathematical…

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What is the Sharpe ratio of the best feasible CAL? Note: Do not round intermediate calculations. Enter your answer as a decimal rounded to 4 places. Sharpe ratio

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

aa.9

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third
is a money market fund that provides a safe return of 7%. The characteristics of the risky funds are as follows:
Stock fund (S)
Bond fund (B)
Expected
Return
22%
12
Standard
Deviation
32%
19
The correlation between the fund returns is 0.11.
Sharpe ratio
What is the Sharpe ratio of the best feasible CAL?
Note: Do not round intermediate calculations. Enter your answer as a decimal rounded to 4 places.

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