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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

A portfolio earned 14% in a year. The risk-free rate was 6%, the portfolio standard deviation was 16%, and its beta was 1.2. What is the Sharpe ratio?

The Sharpe ratio is 0.50. Excess return is 14% minus 6%, which is 8%, and dividing by the total risk of 16% standard deviation gives 0.50. Beta is not used in the Sharpe ratio.

  1. A0.50Correct
  2. B0.875
  3. C0.67
  4. D0.40

Explanation

Sharpe = (14 - 6) / 16 = 8/16 = 0.50. The 0.67 option comes from dividing by beta (8/1.2), which is the Treynor ratio in percentage terms rather than Sharpe. The 0.875 option divides the raw 14% return by 16%, forgetting to subtract the risk-free rate.

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