USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The portfolios identified below are being considered for investment. Assume that during the period under consideration, R f = .04.

-Refer to Exhibit 18.2. Using the Sharpe Measure, which portfolio performed best?
A) W
B) X
C) Y
D) Z
E) Two portfolios are tied.

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The portfolios identified below are being considered for investment. Assume that during the period under consideration, R f = .04.
 
-Refer to Exhibit 18.2. Using the Sharpe Measure, which portfolio performed best?
A) W 
B) X 
C) Y 
D) Z 
E) Two portfolios are tied.

Quizplus · Accepted Answer

To use the Sharpe Measure, we need to calculate the excess return of each portfolio, which is the portfolio's return minus the risk-free rate, divided by the portfolio's standard deviation. The portfolio with the highest Sharpe Ratio is the best. Based on the information given, we know that the risk-free rate is 0.04. Using the data in Exhibit 18.2, we can calculate each portfolio's excess return and Sharpe Ratio:

Portfolio W: (0.10 - 0.04)/0.30 = 0.20
Portfolio X: (0.12 - 0.04)/0.20 = 0.40
Portfolio Y: (0.14 - 0.04)/0.25 = 0.40
Portfolio Z: (0.08 - 0.04)/0.15 = 0.27

Portfolios X and Y have the same highest Sharpe Ratio of 0.40, which is higher than the Sharpe ratios of portfolios W and Z. Thus, the best choice is:

Answer: E
 Two portfolios are tied. The portfolios with the best performance according to the Sharpe Measure are X and Y.