A portfolio with a 15% standard deviation generated a return of 5% last year whe

Question

A portfolio with a 15% standard deviation generated a return of 5% last year when risk free T-bills were paying 1%. You are considering adding one more stock to your portfolio, the stock will boost the portfolio’s expected return to 15% while also increases the standard deviation to 30%. If you are interested in the best risk versus return trade-off, should you add the stock?

A. Yes because it increases the portfolio's Sharpe ratio to 0.50

B. Yes because it increases portfolio's Sharpe ratio to 0.467

C. Yes because it increases portfolio's return to 15%.

D. No because it increases the risk of the portfolio

E. No because it decreases the portfolio's sharpe ratio to 0.267

Explanation / Answer

B. Yes because it increases portfolio's Sharpe ratio to 0.467

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