CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A fund earned a return of 14% in a year. The risk-free rate was 6% and the fund's standard deviation of returns was 16%. Its beta was 1.25. What is the Sharpe ratio of the fund?
The Sharpe ratio is the excess return over the risk-free rate divided by total risk measured by standard deviation. Here (14% - 6%) / 16% = 0.50. Dividing by beta would give the Treynor measure instead, which is not asked.
- A0.50Correct
- B0.64
- C0.875
- D0.40
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 0.50. The figure 0.64 comes from dividing the excess return by beta (8/1.25), which is the Treynor ratio in percentage terms, not Sharpe.
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