An investor has to evaluate the risk and return while making his investment decision. The rate...

An investor has to evaluate the risk and return while making his investment decision. The rate of return and risk for five portfolios are given below. The risk-free rate is at 5%.

Portfolio	Return	Risk
CD	15	15
EF	12	10
GH	10	9
I	9	7
K	8	8

You are required to :

a. Rank the above firms using Sharpe’s index of portfolio performance measure.

b. Discuss the different criteria used for the evaluation of a portfolio. Perform an risk-return analysis using a graph for the above investment options and explain the same (300 words)

Expert Solution

Sharpe ratio is method used to compare a performance of the portfolio for the given level of risk.

Sharpe Ratio = (Return - Risk Free Return) / Risk

b)

Using the chart we observe, portfolio I, with a return of 9, has a risk of 7 whereas portfolio K has a risk of 8 and return of 8. Hence straight away, we have better return on portfolio I than portfolio K.

Portfolio CD has a high return of 15, however risk is also higher of 15.

Best portfolio is EF considering risk return value where we have a return of 12 and risk of 10.

jeff jeffy answered 1 year ago

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