Question A4An Equity Fund’s annualised Return over five years is 8 The Standard Deviation of those returns is 3 and the local Risk-Free Rate is 44aREQUIREDWhat is the Fund’s Sharpe Ratio 2 marks4bREQU

4.a The Sharpe Ratio is calculated by subtracting the Risk-Free Rate from the annualised Return of the Fund and dividing it by the Standard Deviation of the returns.

Sharpe Ratio = (Annualised Return - Risk-Free Rate) / Standard Deviation

In this case, the annualised Return is 8%, the Risk-Free Rate is 4%, and the Standard Deviation is 3%.

Sharpe Ratio = (8% - 4%) / 3% = 4% / 3% = 1.33

Therefore, the Fund's Sharpe Ratio is 1.33.

4.b Under CAPM, the expected return of a security is calculated by multiplying its Beta with the Equity Risk Premium and adding the Risk-Free Rate.

Expected Return = Risk-Free Rate + (Beta * Equity Risk Premium)

In this case, the Beta is 1.2 and the Equity Risk Premium is 5.0%. The Risk-Free Rate is given as 4%.

Expected Return = 4% + (1.2 * 5.0%) = 4% + 6% = 10%

Therefore, under CAPM, the expected return of this Fund would have been 10%.

4.c Given the information in 4.b, this Fund can be described as having generated an excess return over the Risk-Free Rate. The excess return is calculated by subtracting the Risk-Free Rate from the actual return of the Fund.

Excess Return = Actual Return - Risk-Free Rate

In this case, the actual return of the Fund is 8% and the Risk-Free Rate is 4%.

Excess Return = 8% - 4% = 4%

Therefore, this Fund can be described as having generated a 4% excess return over the Risk-Free Rate