FRM Part I · FRM Exam Part I · Fund Management
A hedge fund produced an annual return of 12% with a standard deviation of 18%. The risk-free rate is 3%. 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 3% = 9%, divided by the 18% standard deviation of returns.
- A0.50Correct
- B0.67
- C0.25
- D0.17
Explanation
Sharpe ratio = (12% - 3%) / 18% = 0.50. Dividing the raw return by volatility gives 0.67, which omits the risk-free rate. Dividing the risk-free rate by volatility gives 0.17.
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