NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A PMS portfolio has an annual return of 14%, the risk-free rate is 6%, and the standard deviation of the portfolio is 16%. What is its Sharpe ratio?
The Sharpe ratio is 0.50. It is the excess return over the risk-free rate, 14% minus 6% equals 8%, divided by the portfolio's standard deviation of 16%. This measures return earned per unit of total risk.
- A0.50Correct
- B0.875
- C0.38
- D1.25
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 8/16 = 0.50. The 0.875 figure results from dividing the raw return by the risk-free rate difference wrongly (14/16). The 0.38 figure results from dividing 6 by 16.
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