Financial Management Assignment Help
  • February 3, 2011
  • David Marks
  • 0

Risk Assets

Financial Management Assignment HelpImagine there are only two efficient portfolios of risky assets, EP1 and EP2.  EP1 offers 10% return and 4% risk.  EP2 offers 16% return and 20% risk.  An investor has $100 to invest and may borrow or lend at the same risk free rate of 4%.  Explain which efficient portfolio of risk assets is preffered by the investor ?

Answer

To evaluate the efficient portfolio we will have to look at the Sharpe ratio to analyse how good is portfolio in terms of risk-reward

Sharpe Ratio = (Rp-Rf)/(Standard Deviation)

Sharpe ratio : Portfolio A (Za)= (.10-.04)/.04= 1.5

Sharpe ration: Portfolio B (Zb)= (.16-.04)/.20=0.6

Shape ration of portfolio A is lesser than Porfolio of B.

Therefore Portfolio A is better for investment.

David Marks

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