Question

Joe owns a stock with a beta of 1.5 and a standard deviation of 12%. The stock returned 16%. Ella owns a stock with a beta of 1.34 and a standard deviation of 16.4%. The stock has a total return of 14.8%. The risk free rate is 2.5%. Using the Sharpe ratio, which portfolio performed better

Answer 1

Answer: Joe's portfolio performed better.

Explanation:

The Sharpe ratio provides a risk adjusted return to allow for easier comparison across securities with different risks.

Sharpe ratio = (Return - Risk free rate) / Standard deviation

Joe:

= (16% - 2.5%) /12%

= 1.125

Ella:

= (14.8% - 2.5%) / 16.4%

= 0.75

Joe's portfolio performed better.