Query in Quants

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Query in Quants

Postby rishabhhurkat » Sat Dec 19, 2015 2:30 am

7.The following values about two portfolios have been obtainedThe risk free rate is 5%. Which of the following statements about the two portfolios is true?

A.Portfolio A has a risk not commensurate with its returns as compared to portfolio B
B.A risk neutral investor would prefer portfolio B over A
C.Given the risk in the two portfolios a risk neutral investor would invest in A rather than B

How come answer is "A".
Why to Calculate Sharp Ratio here.??
How Risk of A >Risk of B

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Re: Query in Quants

Postby edupristine » Tue Dec 22, 2015 12:57 pm

Hi Rishabh,
Sharpe ratio is calculated to determine the risk-adjusted return(return on investment on given level of risk). More is the Sharpe ratio more will be the risk adjusted return.

Sharpe ratio for portfolio A: (15% - 5%)/4%= 2.5%
Sharpe ratio for portfolio B: (22% - 5%)/5%= 3.4%

Portfolio B will have more risk adjusted return.

Option A is correct because Portfolio A has 15% of return with 4% deviation to risk while portfolio B has 22% return on only 1% more deviation and its receiving 7% more risk that Portfolio A.
Option B: Risk neutral investor concentrates on return rather than risk that is why he can be neutral on both portfolios.
Option C: Again same as explanation as option B.

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