The Optima Mutual Fund has an expected return of 19.5% and a volatility of 20.4%. Optima claims that no other portfolio offers a higher Sharpe ratio. Suppose this claim is true, and the risk-free interest rate is 5.5%. What is Optima’s Sharpe Ratio? If eBay’s stock has a volatility of 37.8% and an expected return of 9.3%, what must be its correlation with the Optima Fund? If the SubOptima Fund has a correlation of 85% with the Optima Fund, what is the Sharpe ratio of the SubOptima Fund?
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.
The Optima Mutual Fund has an expected return of 19.5% and a volatility of 20.4%. Optima claims that no other portfolio offers a higher Sharpe ratio. Suppose this claim is true, and the risk-free interest rate is 5.5%.
- What is Optima’s Sharpe Ratio?
- If eBay’s stock has a volatility of 37.8% and an expected return of 9.3%, what must be its correlation with the Optima Fund?
- If the SubOptima Fund has a correlation of 85% with the Optima Fund, what is the Sharpe ratio of the SubOptima Fund?
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