Question

The historical returns for two investments - A and B - are summarised in the following...

  1. The historical returns for two investments - A and B - are summarised in the following table for the period 2013 to 2017. Use the data to answer the questions that follow.

Year

Rate of Return

A

B

2013

19%

8%

2014

1%

10%

2015

10%

12%

2016

26%

14%

2017

4%

16%

  1. Calculate the average return for each investment.
  2. Calculate the standard deviation for each investment’s returns. Which investment is more risky?
  3. Calculate the reward-to-variability (Sharpe) ratio for the two investments assuming that the risk-free rate is 4%. Which investment would you choose and why?
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