FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A fund returned 12% over a year while the risk-free rate was 4%. The fund's standard deviation of returns was 16% and its beta against the market was 1.2. What is the fund's Sharpe ratio?
The Sharpe ratio is 0.50. It equals the excess return over the risk-free rate, 12% minus 4% or 8%, divided by total risk measured by the standard deviation of 16%. Beta is not used because Sharpe measures return per unit of total volatility.
- A0.50Correct
- B0.67
- C0.75
- D0.25
Explanation
Sharpe ratio = (12% - 4%) / 16% = 8/16 = 0.50. Dividing the excess return by beta (8/1.2 = 6.67%) gives the Treynor measure, not Sharpe. The result 0.67 comes from dividing 8 by 12, which uses the return rather than the volatility.
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