A friend who knows little about finance calls asking you which stock she should purchase. She knows little about the stocks, but tells you Stock 1 has a Sharpe ratio of 0.43, Stock 2 has a Sharpe ratio of 0.25, Stock 3 has a Sharpe ratio of 0.33 and Stock 4 has a Sharpe ratio of 0.52. Which stock would be best for your friend to purchase?
A) Stock 1
B) Stock 2
C) Stock 3
D) Stock 4

Question

Quizplus · Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. A higher Sharpe ratio indicates a more attractive risk-adjusted return. Therefore, Stock 4, with the highest Sharpe ratio of 0.52, would be the best choice.

A Friend Who Knows Little About Finance Calls Asking You