Over the next year, the stock market will either be a bull market or a bear market. The probability of a bull market is 64.00%, while the probability of a bear market is 36.00%. Shares in Meguire and Company will have a return of 22.20% in a bull market, and -10.60% in a bear market. The risk-free rate is 3.00%. What is the Sharpe Ratio of Meguire and Company shares?

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
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Over the next year, the stock market will either be a bull market or a bear market. The probability of a bull market is 64.00%, while the probability of a bear market is 36.00%. Shares in Meguire and Company will have a return of 22.20% in a bull market, and -10.60% in a bear market. The risk-free rate is 3.00%. What is the Sharpe Ratio of Meguire and Company shares?

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Step 1

expected return of a stock with different probability of return is:

Expected return = Probability×Return

Standrad deviation of the stock is:

Standard deviation=Return-Expected return2×probability

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