Consider the following data for following investments, asset A, B, C, and D: Asset Expected Returns...
Consider the following data for following investments, asset A, B, C, and D:
| Asset | Expected Returns | Std Dev (Risk) |
|---|---|---|
| Investment A: | 3% | 1% |
| Investment B: | 9% | 6% |
| Investment C: | 8% | 5% |
| Investment D: | 13% | 9% |
Given a risk-free rate of 1.55%, the Sharpe ratio for investment A, B, C and D is?
Which investment has performed better in terms of reward per unit of risk?
Homework Answers
Sharpe ratio can be calculated as
Sharpe ratio=
Where
Rp=Expected returns on investment
Rf=Risk free rate
=Std
Deviation i.e. total risk
| Asset | Expected Returns, Rp |
Std Dev (Risk), |
Risk free rate, Rf |
Sharpe Ratio= |
| Investment A: | 3% | 1% | 1.55% | 1.45 |
| Investment B: | 9% | 6% | 1.55% | 1.24 |
| Investment C: | 8% | 5% | 1.55% | 1.29 |
| Investment D: | 13% | 9% | 1.55% | 1.27 |
Sharpe ratio is highest for investment A. It means reward per unit if risk is highest for investment A.
We can say that investment A has performed better in terms of reward per unit of risk.
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