FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A fund returned 12% in a year in which the risk-free rate was 3%. The fund's standard deviation was 18%, its beta versus the benchmark was 1.2, and the benchmark returned 9% with a standard deviation of 15%. What is the fund's Sharpe ratio?
The Sharpe ratio is 0.50. It equals the fund's excess return over the risk-free rate, 12% minus 3% or 9%, divided by the fund's total volatility of 18%. Beta and benchmark data are not used because Sharpe measures return per unit of total risk.
- A0.50Correct
- B0.67
- C0.75
- D0.33
Explanation
Sharpe ratio = (12% - 3%) / 18% = 0.50. The 0.75 option divides by beta-adjusted risk incorrectly using 12% volatility, which is not given. The 0.67 option divides by 13.5 (not given) and the 0.33 option uses the wrong numerator (12%-9%=3%... divided by 9).
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