Question

You observe the following information regarding Company A and Company B:

Company A has a higher expected return than Company B.
Company A has a lower standard deviation of returns than Company B.
Company A has a higher beta than Company B.

Given this information, which of the following statements is CORRECT?

a.   Company A has more company-specific risk than Company B.
b.   Company A has a higher Sharpe ratio than Company B.
c.   Company A has a higher coefficient of variation than Company B.
d.   Company A’s returns will be negative when Company B’s returns are positive.
e.   Company A has less market risk than Company B.

Answer 1

Option a is incorrect because company A has lower standard deviation than company B.
Option b is correct option because Sharpe ratio =(Expected Return-Risk Free Rate)/Standard Deviation
Since Stock A has higher expected return and lower standard deviation it has higher Sharpe ratio.
Option c is incorrect because coefficient of variation = Standard deviation/Expected Return. Since Company A has lower standard deviation and higher expected return it has lower coefficient of variation
Option d is incorrect because it can't be said.
Option e is incorrect because stock A has higher beta and has higher risk.