Bear |
Normal |
Bull |
|
Market |
Market |
Market |
|
Probability |
15.00% |
50.00% |
35.00% |
Stock X |
-12.00% |
10.00% |
21.00% |
Stock Y |
-22.00% |
14.00% |
39.00% |
3.c) If the risk–free rate of return is 2.95%, what are the Sharpe Ratios for stocks X and Y (8 points)? (Please assume that the standard deviations of the excess returns are the same as the standard deviations of returns calculated in part b)
Given that- | |||||||||
i | ii | iii | iv=i*ii | v=i*iii | vi=i*(ii-10.55%%)^2 | vii=i*(iii-17.35%)^2 | |||
Probability | X | Y | Expected return X | Expected return Y | Variance A | Variance B | |||
15% | -12% | -22% | -1.80% | -3.30% | 0.76% | 2.32% | |||
50% | 10% | 14% | 5.00% | 7.00% | 0.00% | 0.06% | |||
35% | 21% | 39% | 7.35% | 13.65% | 0.38% | 1.64% | |||
10.55% | 17.35% | 1.15% | 4.02% | ||||||
Expected return X | 10.55% | ||||||||
Expected return Y | 17.35% | ||||||||
Answer b. | Expected SD of X = 1.15%^0.5 | 10.71% | |||||||
Expected SD of Y = 4.02%^0.5 | 20.05% |
Comment
SHARP RATIO FOR STOCK X = (10.55 - 2.95)/10.71 = 0.70
SHARP RATIO FOR STOCK Y = (17.35 - 2.95)/20.05 = 0.71
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