The following table shows various statistics for Portfolios 1, 2 and 3 Variance of returns (%) Excess returns (%) Skewness Excess Kurtosis Portfolio 1 15.1 7.8 0.0 0.7 Portfolio 2 20.5 10.2 0.9 -1.8 Portfolio 3 29.3 12.9 -1.5 6.2 As an investment adviser you base your allocation on the Sharpe ratio. Assuming a risk free rate of 1.5%, which portfolio are you most likely to recommend? Portfolio 1with Sharpe ratio 2.0007 Portfolio 2 with Sharpe ratio 2.2528 Portfolio 3 with Sharpe ratio 2.3832 Portfolio 3 with Sharpe ratio 2.1061 Portfolio 2 with Sharpe ratio 1.9215
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 following table shows various statistics for Portfolios 1, 2 and 3
| Variance of returns (%) | Excess returns (%) | Skewness | Excess Kurtosis | |
| Portfolio 1 | 15.1 | 7.8 | 0.0 | 0.7 |
| Portfolio 2 | 20.5 | 10.2 | 0.9 | -1.8 |
| Portfolio 3 | 29.3 | 12.9 | -1.5 | 6.2 |
As an investment adviser you base your allocation on the Sharpe ratio. Assuming a risk free rate of 1.5%, which portfolio are you most likely to recommend?
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Portfolio 1with Sharpe ratio 2.0007 |
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Portfolio 2 with Sharpe ratio 2.2528 |
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Portfolio 3 with Sharpe ratio 2.3832 |
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Portfolio 3 with Sharpe ratio 2.1061 |
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Portfolio 2 with Sharpe ratio 1.9215 |
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