Allison's portfolio has an expected return of 14% and a standard deviation of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk-free rate is 3%. According to the Sharpe measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) the portfolio's are equally desirable.
D) the answer depends on Allison and Brianna's risk tolerance.

Question

Quizplus · Accepted Answer

The Sharpe ratio is calculated as (Expected Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio. For Allison, it's (14% - 3%) / 20% = 0.55. For Brianna, it's (11% - 3%) / 12% = 0.67. Since Brianna's Sharpe ratio is higher, her portfolio is considered better according to the Sharpe measure.

Allison's Portfolio Has an Expected Return of 14% and a Standard