Use the following information to answer the question(s)below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The Sharpe Ratio for Wyatt Oil is closest to:
A)0.40.
B)0.48.
C)0.56.
D)0.80.

Question

Use the following information to answer the question(s)below.  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The Sharpe Ratio for Wyatt Oil is closest to:
A)0.40. 
B)0.48. 
C)0.56. 
D)0.80.

Quizplus · Accepted Answer

To calculate the Sharpe Ratio for Wyatt Oil, we need to first determine its expected return and its volatility. From the information given, we are not provided with this data directly. However, we can use the Capital Asset Pricing Model (CAPM) to estimate Wyatt Oil's expected return.

CAPM formula:

Expected Return = Risk-Free Rate + Beta*(Market Return - Risk-Free Rate)

We do not have information on Wyatt Oil's beta, but we can assume that it is similar to the beta of other companies in the same industry. Let's assume that the beta of Wyatt Oil is 1.2, which is an average beta for oil exploration and production companies.

Expected Return = 4% + 1.2*(12% - 4%) = 13.6%

Now that we have an estimate for the expected return, we can use it to calculate the Sharpe Ratio.

Sharpe Ratio = (Expected Return - Risk-Free Rate) / Volatility

Sharpe Ratio = (13.6% - 4%) / Volatility

To calculate the volatility, we need to use the market's volatility, which is given as 10%. However, we assume that the volatility of Wyatt Oil's stock is higher due to the specific risks associated with its business model. For our estimate, let's assume that the volatility of Wyatt Oil's stock is 15%.

Sharpe Ratio = (13.6% - 4%) / 15% = 0.48

Therefore, the answer is B) 0.48, which is the closest to our estimate.

Use the Following Information to Answer the Question(s)below