Question

Question 15 IP Consider the information for Stock Art and Stock Bxa below. The risk-free interest rate is 3.90%. If you have to choose only one of these stocks for your investment, which stock would you choose based on the Sharpe Ratio? Stock Art 11.6% Stock Bxa 8% Expected return Standard deviation 5.8% 4.6% Stock Bxa Stock Art

Answer 1

Given, Risk free interest rate (R_f) = 3.90%

sharpe ratio a Rs - RE here, & a a Return of stock risk-free interest standard deviation rate of stock For Stock Art, ķ > 11.6% 2 5.8% sharpe ratio a = 11.6% - 3.90% __ 5.8% 7.7% 5-8 % 21:33 for stock BXA R 2 8% o = 4.6% sharpe ratio 8% - 3.90 % 4.6% 2 0.89 4.1 % 4.6%

Sharpe ratio for Stock Art = 1.33 and Sharpe ratio for Stock Bxa = 0.89

Higher sharpe ratio indicates better performance of a stock.

Hence, One has to choose Stock Art for investment.