Question

Consider the following data for two investments, A and B:

Investment A: x¯x¯ = 13 and s = 10

Investment B: x¯x¯ = 12 and s = 9

1. Which investment provides a higher return?

• Investment A

• Investment B

1.a. Which investment provides less risk?

• Investment B

• Investment A

2. Given a risk-free rate of 2.50%, calculate the Sharpe ratio for each investment. (Round your answers to 2 decimal places.)

	Sharpe Ratio
Investment A
Investment B

2.a. Which investment provides a higher reward per unit of risk?

• Investment B

• Investment A

Answer 1

Investment A: x¯x¯ = 13 and s = 10

Investment B: x¯x¯ = 12 and s = 9

Question 1

here as the investment A has higher mean return so we can say that investment A provided higher return.

Question 1.a

Here as we can see the standard deviation for Investment B is less than investment A so, investment B is less risky.

QUestion 2

Here risk free return = 2.5%

Here sharpe ratio = [Portfolio return - Risk free return]/[Standard deviation of portfolio]

so for investment A

Sharpe ratio = (13 - 2.5)/10 = 1.05

for investment B

Sharpe Ratio = (12 - 2.5)/9 = 1.05556 or 1.06

question 2.a

Here as Investment B has more sharpe ratio so it will provides a higher reward per unit of risk