FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A fund returned 12% in a year when the risk-free rate was 3% and the fund's return standard deviation was 18%. The market portfolio returned 10% 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 own return standard deviation of 18%. The market's volatility is irrelevant to this measure.
- A0.50Correct
- B0.67
- C0.60
- D0.47
Explanation
Sharpe ratio = (12% - 3%) / 18% = 9/18 = 0.50. Using the market's standard deviation of 15% would give 0.60, which is wrong because the fund's own total risk must be used. Dividing the raw return 12% by 18% gives 0.67, which ignores the risk-free rate.
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