Skip to content

FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

A fund returned 12% over a year, the risk-free rate was 3%, and the fund's return volatility was 15%. The fund's beta to its benchmark was 1.2 and its tracking error was 5%. What is the fund's Sharpe ratio?

The Sharpe ratio is 0.60. It equals excess return over the risk-free rate (12% minus 3%, or 9%) divided by total volatility of 15%. Beta and tracking error are not used in the Sharpe ratio, which measures reward per unit of total risk.

  1. A0.60Correct
  2. B0.75
  3. C0.80
  4. D1.80

Explanation

Sharpe ratio = (12% - 3%) / 15% = 0.60. Dividing by beta (9/1.2 = 7.5) gives the Treynor measure, not Sharpe. Using 5% tracking error would give 1.80, which is an information-ratio-style error.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Performance Evaluation shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Performance EvaluationFree diagnostic mock

More Portfolio Performance Evaluation questions