Question

There are two stocks, A and B, with means and standard deviations of their monthly return...

  1. There are two stocks, A and B, with means and standard deviations of their monthly return are given below:
    1. (5) What is the Sharpe ratio for each stock? (Sharpe ratio=mean/sd)
    2. (5) Which stock is a better investment in terms of Sharpe ratio? Why?
    3. (10) Assume the monthly return of Stock A is normally distributed, what is the 1% value at risk (a dollar amount) if we invest $200,000 in Stock A?

Stock

mean

Standard deviation

A

0.1%

2.23%

B

0.12%

2.30%
Math   Statistics-And-Probability   
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Answer #1

a. Sharpe ratio for stock A=0.044843050.045

  Sharpe ratio for stock B=0.052173910.052

b. Basically Sharpe ratio less than 1.0 is considered to be poor. But here both the stocks have Sharpe ratios less than 1 and among them stock B has larger Sharpe ratio. So stock B is better investment in terms of Sharpe ratio.

c. To find the 1% value at risk of invested amount we will caculate based on 99% confidence interval i,e. mean of stock A - 2.33*standard deviation of stock A =0.1%-2.33*2.23%= -5.0959 % which is 1% value at risk(VaR)

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