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How will change affect the sharpe ratio of your portfolio

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Reference no: EM132977623

Question - Suppose that your retirement investment is automatically invested into a Vanguard mutual fund that tracks the S&P 500 so that you are currently 100% invested in the fund. The Sharpe ratio of this mutual fund is 0.38 (Expected return = 8%; Standard Deviation = 18.4%). Now suppose that your company adds a money market mutual fund to the retirement plan. This gives you the right to mix your investment between the S&P 500 mutual fund and this risk-free alternative. Suppose that you would like to hold a portfolio with a lower return standard deviation than the S&P 500 fund. So, you decide to hold 25% of your portfolio in the money market fund. How will this change affect the Sharpe ratio of your portfolio?

a. The Sharpe ratio will remain 0.38.

b. The Sharpe ratio will decrease.

c. More information is required to determine the effect on the Sharpe ratio.

d. The Sharpe ratio will increase.

Reference no: EM132977623

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