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Q3B.

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Essentials Of Investments
Found in: Page 141
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

When estimating a Sharpe ratio, would it make sense to use the average excess real return that accounts for inflation?

No. The input should use nominal data and not use average excess real return data.

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Step by Step Solution

Given information

What: Use of average excess real return that accounts for inflation

When: In estimating a Sharpe ratio estimation

Giving reason

Sharpe ratio also called reward to volatility ratio represents extra returns per extra risk. It was named after William Sharpe.

While estimating a Sharpe ratio, all items are presented in nominal figures, the input should also use nominal data and not the average excess real return data.

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