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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

A portfolio earned 14% in a year with a standard deviation of 10%. The risk-free rate is 6%. What is the Sharpe ratio?

Sharpe ratio equals excess return over the risk-free rate divided by standard deviation. Here that is (14% - 6%) divided by 10%, which gives 0.80. It measures return earned per unit of total risk.

  1. A1.40
  2. B0.60
  3. C0.80Correct
  4. D0.08

Explanation

Sharpe ratio = (portfolio return - risk-free rate)/standard deviation = (14 - 6)/10 = 0.80. Using 14/10 gives 1.40 because the risk-free rate is not subtracted. Using 6/10 gives 0.60, which uses the risk-free rate alone. 0.08 is the excess return as a decimal and is not divided by risk.

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