NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
A portfolio earned a return of 14% in a year in which the risk-free rate was 6%. The portfolio's standard deviation was 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% equal to 8%, divided by the portfolio's standard deviation of 16%. It measures return earned per unit of total risk taken.
- A0.50Correct
- B0.875
- C0.38
- D2.00
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 8/16 = 0.50. Using 14/16 = 0.875 ignores the risk-free rate. Using 6/16 = 0.375 uses the risk-free rate instead of the excess return. Using 16/8 = 2.00 inverts the ratio.
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