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Use the following scenario analysis for stocks X and Y to answer the questions. Bear Normal...

Use the following scenario analysis for stocks X and Y to answer the questions.

Bear Normal Bull
Market Market Market
Probability 20.00% 45.00% 35.00%
Stock X -13.00% 11.00% 28.00%
Stock Y -26.00% 16.00% 46.00%

Assume you have a $200,000 portfolio and you invest $75,000 in stock X and the remainder in stock Y. If the risk–free rate of return is 3.50%, and we assume that the standard deviation of the excess returns on the portfolio is 18%, what is the Sharpe Ratio for this portfolio formed from stocks X and Y?   

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Answer #1

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Sharpe ratio= (Expected return-Risk free Return)/standard deviation.

Expected return- in the image.

Risk free Return- given= 3.5%

standard deviation= 18%

SR= (15.87%-3.50%)/18%0

SR= 0.6872 (Answer)

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