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You are considering two alternative 2-year investments: You can invest in a risky asset with a positive risk premium and returns in each of the
You are considering two alternative 2-year investments: You can invest in a risky asset with a positive risk premium and returns in each of the 2 years that will be identically distributed and uncorrelated, or you can invest in the risky asset for only 1 year and then invest the proceeds in a risk- free asset. Do you think that the following statement regarding the first investment alternative (compared with the second) is true? Its Sharpe ratio is lower.
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