Over the next year, the stock market will either be a bull market or a bear market. The probability of a bull market is 25.00%, while the probability of a bear market is 84.00%. Shares in Meguire and Company will have a return of 16.80% in a bull market, and -8.30% in a bear market. The risk-free rate is 2.90%. What is the Sharpe Ratio of Meguire and Company shares?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Over the next year, the stock market will either be a bull market or a bear market. The probability of a bull market is 25.00%, while the probability of a bear market is 84.00%. Shares in Meguire and Company will have a return of 16.80% in a bull market, and -8.30% in a bear market. The risk-free rate is 2.90%. What is the Sharpe Ratio of Meguire and Company shares?
The Sharpe ratio of a company is used by investors to measure its performance. It measures the risk-adjusted return of the company’s shares. A higher Sharpe ratio is preferred by investors as it signifies more return per unit of risk.
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