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(NO EXCEL WORK) The recent price history for a nondividend-paying stock is provided below. The risk-free...

(NO EXCEL WORK)

The recent price history for a nondividend-paying stock is provided below. The risk-free rate is 3%.

a. Estimate the stock’s Sharpe ratio.

Month

Price

1

50

2

47

3

53

4

56

5

60

6

59
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Homework Answers

Answer #1

Using the data above, it is easy to find the Standard deviation and Avg return on the stock.

Month Price(X) Return X-Avg (X - Avg)2
1 50 0 -0.02984 0.00089
2 47 -0.06 -0.08984 0.008071
3 53 0.12766 0.097822 0.009569
4 56 0.056604 0.026766 0.000716
5 60 0.071429 0.041591 0.00173
6 59 -0.01667 -0.0465 0.002163
325 0.023139

The avg is 0.1790/6 = 0.029838. The Standard deviation of the data is 0.068028.

Hence the Sharpe Ratio is

= (0.029838 - 0.03) / 0.06802

The sharpe Ratio is -0.00239
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