NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS portfolio returned 16% in a year. The risk-free rate was 6% and the portfolio's standard deviation was 20%. What is its Sharpe ratio?
The Sharpe ratio is 0.50. It is computed as the excess return over the risk-free rate (16% minus 6% = 10%) divided by the standard deviation of 20%, which measures return earned per unit of total risk.
- A0.50Correct
- B0.80
- C0.30
- D2.00
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (16 - 6) / 20 = 10/20 = 0.50. Using 16/20 = 0.80 ignores the risk-free rate. Using 6/20 = 0.30 uses the risk-free rate instead of the excess return.
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