Question

Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 11 percent and standard deviation of 34 percent. The average return and standard deviation of WholeMart are 12 percent and 40 percent; and of Fruit Fly are 17 percent and 30 percent.

Answer 1

The risk-return relationship is calculated using Sharpe ratio which is given by:
(Asset's average return-risk free rate)/Standard deviation
As risk free rate will be same for all the three assets, same value will be subtracted from the asset's average return and divided by the respective standard deviation. So, we can compare using asset's average return/standard deviation to rank the stocks.

Night Ryder:
Using the given values, we calculate the risk-return relationship as:
Average return/Standard deviation=11%/34%=0.323529412

Whole Mart:
Using the given values, we calculate the risk-return relationship as:
Average return/Standard deviation=12%/40%=0.3

Fruit Fly:
Using the given values, we calculate the risk-return relationship as:
Average return/Standard deviation=17%/30%=0.566666667

Higher risk to return ratio is preferred.
Ranking of the stocks by their risk-return relationship, best to worst.
Rank 1:Fruit Fly
Rank 2:Night Ryder
Rank 3:Whole Mart