Using an example of two stocks (e.g., A and B) with hypothetical known values for the mean return and standard deviation (you should provide the numerical values), discuss how the Coefficient of Variation can be used to compare the relative risks of the two stocks. If the risk- free return is 1%, what are the Sharpe Ratios for the two stocks? How do you compare the returns of the two stocks using the Sharpe Ratios? What are the potential limitations of comparing risks and returns in this way?
Using an example of two stocks (e.g., A and B) with hypothetical known values for the mean return and standard deviation (you should provide the numerical values), discuss how the Coefficient of Variation can be used to compare the relative risks of the two stocks. If the risk- free return is 1%, what are the Sharpe Ratios for the two stocks? How do you compare the returns of the two stocks using the Sharpe Ratios? What are the potential limitations of comparing risks and returns in this way?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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.
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Transcribed Image Text:Using an example of two stocks (e.g., A and B)
with hypothetical known values for the mean
return and standard deviation (you should
provide the numerical values), discuss how the
Coefficient of Variation can be used to compare
the relative risks of the two stocks. If the risk-
free return is 1%, what are the Sharpe Ratios
for the two stocks? How do you compare the
returns of the two stocks using the Sharpe
Ratios? What are the potential limitations of
comparing risks and returns in this way?
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