Question

Stocks A and B have the same Sharpe ratio. We are told that stock A has a volatility of 16% and an expected return of 10%. The risk free rate is 2%. If stock B's volatility is equal to 10%, then B's expected return will be:

	a.	7.00%
	b.	22.00%
	c.	2.08%
	d.	4.00%

Answer 1

- Formula for Shape's ratio = (Expected Return - Risk free Return)/volatility(or Standard deviation)

Shape's ratio of Stock A = (10% - 2%)/16%

Shape's ratio of Stock A = 0.5

As both Stock A and STock B have same Shape's ratio.

Thus, Shape's ratio of Stock B is 0.5

0.5 = (Expected Return of Stock B - 2%)/10%

5% = Expected Return of Stock B - 2%

Expected Return of Stock B = 7%

Option A

If you need any clarification, you can ask in comments.    

If you like my answer, then please up-vote as it will be motivating