Consider two assets: a stock and gold. The stock offers an expected return of 16% with a standard deviation of 22%, and gold offers an expected return of 9% with a standard deviation of 40%. Also, risk-free saving is available with return of 5%. Assume that you cannot short-sell and buy on margin. (Hint: consider the portfolio opportunity set/efficient frontier and CAL)

(a) Compute the Sharpe ratios of these assets.
(b) Explain with a graph under what condition(s) will investors hold the asset with the lower Sharpe ratio.

Answer rating: 100% (QA)

a The Sharpe ratio is a measure of riskadjusted return which indicates the excess return an asset of... View the full answer