GMAT Focus EditionData InsightsEasy
A financial analyst is evaluating the performance of four investment funds over the past year. The table below shows each fund's return on investment (ROI) and its standard deviation (SD). The analyst wants to identify the fund with the best risk-adjusted return, defined as the highest ratio of ROI to SD. | Fund | ROI (%) | SD (%) | |---|---|---| | Alpha | 12 | 4 | | Beta | 15 | 6 | | Gamma | 10 | 2 | | Delta | 18 | 9 | Which fund offers the best risk-adjusted return?
- AFund Alpha
- BFund Delta
- CFund Gamma
- DFund Beta
Show answer & explanationAnswer & explanation
Correct answer: C. Fund Gamma
To find the best risk-adjusted return, calculate the ratio of ROI to SD for each fund. Fund Alpha: 12/4 = 3. Fund Beta: 15/6 = 2.5. Fund Gamma: 10/2 = 5. Fund Delta: 18/9 = 2. Fund Gamma has the highest ratio of 5.
Why the other options are wrong
- A. Fund Alpha's ratio is 3, which is not the highest.
- B. Fund Delta's ratio is 2, which is the lowest.
- D. Fund Beta's ratio is 2.5, which is not the highest.
Risk-Adjusted Return
A measure of return that considers the amount of risk taken to achieve that return, often calculated as a ratio of return to a risk metric like standard deviation.
- Higher ratio indicates better performance.
- Standard deviation is a common measure of risk.
- Useful for comparing investments with different risk profiles.
Memory trick: ROI's shield protects against SD.