Stock A B C D Expected Return 5% 5% 7% 6%
Standard Deviation 10% 12% 12% 11%
Which of the following statements is true?
A)A is a better investment than B.
B)B is a better investment than C.
C)C is a better investment than D.
D)D is a better investment than C.

Question

Quizplus · Accepted Answer

To compare the investments, we need to look at their risk-return tradeoff, which is captured by the Sharpe ratio (expected return divided by standard deviation). The higher the Sharpe ratio, the better the investment. A has a Sharpe ratio of 0.5 (5%/10%), B has a Sharpe ratio of 0.4167 (5%/12%), C has a Sharpe ratio of 0.5833 (7%/12%), and D has a Sharpe ratio of 0.5455 (6%/11%). Therefore, A has the highest Sharpe ratio and is the best investment.

Stock a B C D Expected Return 5% 5% 7