Final answer:
The Sharpe ratio can be used to compare investing in companies by measuring their risk-adjusted returns. Company A has a higher Sharpe ratio than Company B, suggesting it has a higher risk-adjusted return. Therefore, investing in Company A is expected to provide a higher return for the level of risk taken.
Step-by-step explanation:
The Sharpe ratio is a measure of risk-adjusted return that compares the return of an investment to its risk. To compare investing in companies A and B, we can calculate the Sharpe ratio for each company using the given information.
First, we need to calculate the excess return of each company, which is the difference between the mean profit and the risk-free rate of interest:
Company A: Excess return = Mean profit - Risk-free rate = $240 - 0.1% = $239.90
Company B: Excess return = Mean profit - Risk-free rate = $110 - 0.1% = $109.90
Next, we calculate the standard deviation of each company's profit:
Company A: Standard deviation = $13.50
Company B: Standard deviation = $6.50
Finally, we calculate the Sharpe ratio:
Company A: Sharpe ratio = Excess return / Standard deviation = $239.90 / $13.50 = 17.77
Company B: Sharpe ratio = Excess return / Standard deviation = $109.90 / $6.50 = 16.91
Therefore, based on the Sharpe ratio, investing in Company A is expected to provide a higher risk-adjusted return compared to investing in Company B.