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 18% with a standard deviation of 10%. The risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 1.2. It is the portfolio return less the risk-free rate, which is 12%, divided by the standard deviation of 10%, giving the excess return earned per unit of total risk.
- A1.8
- B0.6
- C1.2Correct
- D3.0
Explanation
Sharpe ratio = (18% - 6%) / 10% = 12/10 = 1.2. Using 18/10 = 1.8 ignores deducting the risk-free rate. Using 6/10 = 0.6 divides the risk-free rate by risk instead. 3.0 comes from 18/6, an incorrect denominator.
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