Question

Consider the following information:Portfolio Expected Return Standard DeviationRisk-free 6.0% 0%Market 10.2 21A 8.2 10a. Calculate the sharpe ratios for the market portfolio and portfolio A. (Round your answers to 2 decimal places.)Sharpe RatioMarket portfolio Portfolio A b.If the simple CAPM is valid, state whether the above situation is possible?YesNo

Answer 1

Step-by-step explanation:

Given the following :

Portfolio - - - - - - Expected return - - - Std

Risk-free - - - - - - - - 6.0% - - - - - - - - - - 0%

Market - - - - - - - - - 10.2 - - - - - - - - - - - - 21

A - - - - - - - - - - - - - 8.2 - - - - - - - - - - - - 10

Calculate the sharpe ratios for the market portfolio and portfolio A.

Sharpe Ratio = (Expected portfolio return - Risk-free rate of return) / standard deviation of portfolio return

Sharpe ratio of market portfolio:

(10.2 - 6) / 21

4.2 / 21 = 0.20

Sharpe ratio of portfolio A:

(8.2 - 6) / 10

2.2 / 10 = 0.22

B) NO

If simple CAPM is valid, the above situation is Not possible, BECAUSE, according to the simple Capital Asset Pricing Model, the market portfolio is the most efficient, however with a Sharpe ratio of 0.20, which is lower than the sharpe ratio obtained for portfolio A, 0.22 then, portfolio A is more efficient.