NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
A portfolio earned 15% in a year when the risk-free rate was 6%. Its standard deviation was 18%. What is its Sharpe ratio?
The Sharpe ratio is 0.50. It equals the portfolio's excess return over the risk-free rate divided by its standard deviation. Excess return is 15% minus 6%, which is 9%, and dividing 9% by 18% gives 0.50.
- A0.50Correct
- B0.83
- C0.33
- D1.50
Explanation
Sharpe ratio = (15% - 6%) / 18% = 9/18 = 0.50. Option 0.83 divides the return by SD ignoring the risk-free rate (15/18). Option 0.33 uses 6/18. Option 1.50 divides 9 by 6.
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