NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS portfolio earned a return of 15% with a standard deviation of 10%. The risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 0.90. It is computed as portfolio return minus the risk-free rate, divided by the standard deviation: (15% - 6%) divided by 10%. It shows excess return earned per unit of total risk taken by the portfolio.
- A0.90Correct
- B1.50
- C0.60
- D2.10
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (15 - 6) / 10 = 0.90. Dividing the raw return by risk without subtracting the risk-free rate gives 1.50. Dividing 6 by 10 gives 0.60, which uses only the risk-free rate.
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