Calculating Sharpe's Ratio and Jensen's Alpha
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Understanding how to measure between risk and return by calculating Sharpe's Ratio and Jensen's Alpha.
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I want you to consider the optimal way to combine the ranking of funds by returns and risk. Using the 10 years of data provided, you will calculate the Sharpe ratio for each fund. Also, using the data you generated in your last homework assignment, you will calculate Jensen's alpha for each fund using regression. I have done the calculations for the Fast Track Growth Fund to help you get started.
In this homework assignment you will continue to explore the relationship between risk and return. You will be introduced to two additional metrics, Jensen's Alpha and Sharpe Ratio, which will help you determine the risk return tradeoff of each security.
When you complete the data compilation, write a memo explaining and defending your recommendations for a final ranking of the risk-adjusted performance of each fund and its manager.
Assignment:
Using the spreadsheet document labeled Soundsleep Funds Data, generate the Jensen's alpha and Sharpe ratio for each fund. Next, create two sets of rankings?one based on each of these measures. Note that an example, as seen in the Fast Track Growth Fund Update, has been included for your review. This should assist you with your calculations and presentation.
After you have completed your calculations, write a memo (300 words or less) summarizing your fund analysis. The memo should include the following:
? An interpretation of your findings and a comparison of the rankings in this step with the results from your rankings from Soundsleep's previous homework assignment
? Comments about the performance of any fund that surprised you
? A discussion of why the rankings you arrived at in your memo from last weeks Soundsleep homework assignment are different from the rankings you just created.
? An observation of how your ranking did or did not take into consideration the different objectives of each fund.
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