8. Risk-adjusted stock measurement methods: Sharpe index

Suppose you know the following information about two stocks:

Stock	Average Monthly Return	Annualized Risk-Free Rate	Standard Deviation of Monthly Returns
A	0.9%	0.3%	1.8%
B	0.8%	0.3%	1.7%

Based on the information in the table, which stock has a higher return?

Stock A

Stock B

Based on the information in the table, which stock has a higher level of risk?

Stock A

Stock B

There are several ways in which investors can measure a stocks risk. One is to examine the volatility of stock returns by using the reward-to-variability ratio, also known as the Sharpe index.

Based on the information in the table, the Sharpe index for stock A is:

0.1667

0.2333

0.3333

0.5

Based on the information in the table, the Sharpe index for stock B is:

0.1765

0.2353

0.2941

0.3824

Based on the Sharpe ratios, which stock offers more expected excess return per unit of risk?

Stock A

Stock B