Question

2. JP Morgan Asset Management, last year created a well-diversified portfolio of 45 stocks. It had...

2. JP Morgan Asset Management, last year created a well-diversified portfolio of 45 stocks. It had a rate of return of 15% and 6.25%variance. The T-bills rates were 4.5% in the US. Calculate the Sharpe ratio of this portfolio and comment on your answer.

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Answer #1

The Formula for sharpe Ratio is

= (Return on Portfolio - Risk Free Rate) / Standard Deviation of portfolio

= ( 15 - 4.5) / (Square Root of Variance - 6.25%)

= 4.2169

The 4.2169 indicates the return per unit of Risk. It means as an investor is investing in JP Morgan rather than T-Bills, so it is taking default risk and other risk. So for that JP Morgan is offering 4.2169% extra return for each unit of risk that an investor is taking.

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