A measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The standard deviation and return of the funds over the past 10 years are listed here.

Calculate the Sharpe ratio for each of these funds. Assume that the expected return and standard deviation of the company equity will be 18 per cent and 70 per cent, respectively. Calculate the Sharpe ratio for the company shares. How appropriate is the Sharpe ratio for these assets? When would you use the Sharpe ratio?

10-year annual return

(%)

Standard deviation

(%)

Skandla Market Index Fund 11.48 15.82 Skandla Small-Cap Fund 16.68 19.64 Skandla LargeCompany Equity Fund 11.85 15.41 Skandla Bond Fund 9.67 10.83