medium · Quantitative Finance
A trader is comparing two portfolios using the Sharpe Ratio. Portfolio A has an expected return of 14% and volatility of 20%. Portfolio B has an expected return of 8% and volatility of 9%.
Given a risk-free rate of 3%, which statement is correct?
- Portfolio B is superior because its Sharpe Ratio is approximately 0.556, while A's is 0.550.
- Portfolio A is superior because its raw return is higher.
- Both are identical because their volatilities are proportional to their returns.
- Portfolio A is superior because its volatility is higher, allowing for more leverage.
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