FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management
A fund earned an average annual return of 11% with a standard deviation of 16%. The risk-free rate is 3%. What is the fund's Sharpe ratio?
The Sharpe ratio is 0.50. It equals the excess return over the risk-free rate, 11% minus 3% = 8%, divided by the standard deviation of 16%. Using the total return without subtracting the risk-free rate would wrongly give 0.69.
- A0.50Correct
- B0.69
- C0.19
- D0.73
Explanation
Sharpe ratio = (11% - 3%) / 16% = 8/16 = 0.50. Dividing the raw return by volatility (11/16 = 0.69) ignores the risk-free rate and is wrong.
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