In comparing two investments based on the following data:
Investment A:
Return: 10%
Standard deviation: 5%
Investment B:
Return: 8%
Standard deviation: 2%
While Investment A has a higher return, Investment B offers a more attractive risk-adjusted profile. The lower standard deviation of 2% for Investment B indicates a narrower range of volatility or uncertainty.
Risk-Adjusted Returns:
Calculating the Sharpe ratio, which is a measure of risk-adjusted return:
Investment A's Sharpe Ratio: 1.0
Investment B's Sharpe Ratio: 1.5
A higher Sharpe ratio signifies better risk-adjusted performance. Investment B's higher ratio indicates a superior return relative to its lower risk, making it a more favorable option for investors seeking a balance between returns and risk management.
