Question

you are planning to buy $10,000 worth of ibm and $30,000 worth of apple stock. according to an analyst, the expected returns for next year are 7% for ibm and 10% for apple, with a standard deviation of 16% for ibm and 30% for apple. the risk-free rate is 4%. the correlation between the two stocks' returns is 0.42. what is ibm's sharpe ratio? round to two decimal places.

Answer 1

IBM's Sharpe ratio is calculated using the expected return, risk-free rate, and standard deviation for IBM. The formula yields a Sharpe ratio of 0.1875, which rounds to 0.19 when rounded to two decimal places.

Step-by-step explanation:

To calculate the Sharpe ratio for IBM stock, we use the formula:

Sharpe ratio = (Expected return of the asset - Risk-free rate) / Standard deviation of the asset

Given the information:

Expected return for IBM: 7%

Risk-free rate: 4%

Standard deviation for IBM: 16%

Now let's plug in the values:

Sharpe ratio for IBM = (0.07 - 0.04) / 0.16 = 0.1875

When rounded to two decimal places, IBM's Sharpe ratio is 0.19.

Answer 2

The Sharpe ratio for IBM is approximately 0.19 when rounded to two decimal places.

Step-by-step explanation:

The Sharpe ratio is a measure of risk-adjusted return and it helps investors evaluate the return generated by an investment compared to its risk. To calculate the Sharpe ratio, we subtract the risk-free rate from the expected return of the investment and divide it by the standard deviation of the investment. In this case, the expected return for IBM is 7% and the standard deviation is 16%.

The Sharpe ratio for IBM can be calculated as follows:

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

= (0.07 - 0.04) / 0.16

= 0.03 / 0.16

= 0.1875

Therefore, IBM's Sharpe ratio is approximately 0.19 when rounded to two decimal places.