CMA Final · Strategic Financial Management · Mutual Funds
A fund has an average annual return of 14%, standard deviation of 20% and beta of 1.2. The risk-free rate is 6%. What is the fund's Sharpe ratio?
The Sharpe ratio is 0.40. It is the excess return over the risk-free rate, 14% minus 6% which is 8%, divided by total risk measured by standard deviation of 20%. Dividing by beta would give the Treynor ratio instead.
- A0.40Correct
- B0.67
- C0.33
- D0.45
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6)/20 = 0.40. Using beta in the denominator gives the Treynor measure (8/1.2 = 6.67), which is a different measure, so it is not the answer.
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