A money manager requires all stocks in his or her portfolio to have, at worst, a Sharpe Ratio of 2.0. Currently, the market risk premium is estimated to be 6.5%. If a stock has a standard deviation of 7% and a Beta of 1.25, will it meet this criteria? (Hint: will require algebra to combine the Sharpe Ratio formula and the CAPM formula)
A. This stock meets the criteria because the Sharpe Ratio is greater than 2.0
B. This stock meets the criteria because the Sharpe Ratio is less than 2.0
C. This stock doesn’t meet the criteria because the Sharpe Ratio is greater than 2.0
D. This stock doesn’t meet the criteria because the Sharpe Ratio is less than 2.0