Question

Consider the following information:

Portfolio	Expected Return		Standard Deviation
Risk-free	6	%	0	%
Market	10.8		24
A	8.8		13

a. Calculate the Sharpe ratios for the market portfolio and portfolio A. (Round your answers to 2 decimal places.)

b. If the simple CAPM is valid, is the above situation possible?

• Yes

• No

Answer 1

a. sharpe ratio of market portfolio = (expected return of portfolio - risk free return on portfolio)/ standard deviation

= (10.8 - 6)/24 = 0.2

  

sharpe ratio of market portfolio = (expected return of portfolio - risk free return on portfolio)/ standard deviation

= (8.8 - 6)/13 = 0.2154

b. yes.