NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Mutual Funds
A fund's portfolio has a return of 14%, the risk-free rate is 6%, and the portfolio's standard deviation is 16%. What is the Sharpe ratio of the portfolio?
The Sharpe ratio is 0.50, calculated as the excess return over the risk-free rate (14% minus 6%, i.e. 8%) divided by the standard deviation of 16%. It measures return earned per unit of total risk.
- A0.50Correct
- B0.875
- C0.38
- D2.00
Explanation
Sharpe ratio = (14 - 6)/16 = 8/16 = 0.50. 0.875 divides the return itself (14) by 16 and ignores the risk-free rate. 0.38 divides 6 by 16. 2.00 inverts the ratio.
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