Suppose that an investor has a utility function E[r] - a(r)2, where g measures t

Question

Suppose that an investor has a utility function E[r] - a(r)2, where g measures the investor's risk-aversion level. The Sharpe ratio of any portfolio is defi Then, does every investor necessarily prefer a portfolio with a higher Sharpe ratio to a portfolio with a lower Sharpe ratio? 6. a(r) 7. You are currently investing in 1,000 individual local stocks and a risk-free bond whose capital allocation line (opportunity set) has a slope of 0.5. Now, you have found that there is a company in Vietnam whose Sharpe ratio is larger than 0.5. If you add this company's stock to your current portfolio, will you be better off? If yes, how will you adjust your portfolio? Explain your answer using a diagram.

Explanation / Answer

Ans 6: The sharpe ratio is a good measure of risk adjusted return on investment. it isused to calculate to evaluate performance of investment portfolio. Higher sharpe ratios is good indication that a investment porfolio is performing good as it has better historical risk adjusted performance. So we can say while choosing a portfolio for investment than higher ratio as per sharpe ratio investment can be choosen.

Ans 7: As per sharpe ratio is known to be for company if it is above 1. In case of adjusting portfolio roughtly majorrity of investment should be done in stocks and remainig in bonds.

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