Learning Goal: I’m working on a business question and need an explanation and answer to help me learn.
Consider Mastercard Incorporated, which had an annual return of -16.45% in the past year. Let’s say that historically, the volatility of Mastercard’s annual stock returns has been around 26%. Now consider the S&P 500, whose return over the past year has been -17.75% and historical volatility of annual returns is around 30%. If you are a risk-averse investor who wants to maximize Sharpe ratio, answer the following:
1. Which security would you pick and why?
2. What could be some problems with your choice of investment?
3. How do you interpret negative Sharpe ratios?
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