Consider Mastercard Incorporated, which had an annual return of -16.45% in the past year. Let's say that historically, the volatility of Mastercard's annual stock returns has been around 26%. Now consider the S&P 500, whose return over the past year has been -17.75% and historical volatility of annual returns is around 30%. If you are a risk-averse investor who wants to maximize Sharpe ratio, answer the following:

1. Which security would you pick and why?
2. What could be some problems with your choice of investment?
3. How do you interpret negative Sharpe ratios?  

Answer rating: 100% (QA)

1 To determine which security to pick as a riskaverse investor aiming to maximize the Sharpe ratio c... View the full answer