Question

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

Mean (%) Standard Deviation (%)

Investment A 8 6

Investment B 9 8

Which investment provides the highest return per unit of risk, given a risk-free rate of 1.35%?

1. There isn't enough information to answer this question.

2. There isn't any difference in the amount of return per unit of risk for these two investments.

3. Investment B 4. Investment A

Answer 1

We have

Investment A

Mean = 8% S.D. = 6%

Investment B

Mean =9% S.D. = 8%

To calculate the return per unit of risk , we use the Sharpe's ratio for it. The higher Sharpe ratio the higher is the return.

Sharpe Ratio =

We have the risk free rf = 1.35%

Investment A

Sharpe Ratio = (8 - 1.35) / 6

Sharpe Ratio for A = 1.108

Investment B

Sharpe Ratio = (9 - 1.35) / 8

Sharpe Ratio for B = 0.956

Since the Sharpe Ratio is higher for A, we can say that

Which investment provides the highest return per unit of risk, given a risk-free rate of 1.35%?

4. Investment A