NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
A portfolio earned a return of 14% in a year, the risk-free rate was 6%, and 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% which is 8%, divided by the portfolio's standard deviation of 16%. It shows the reward earned per unit of total risk taken.
- A0.50Correct
- B0.875
- C0.38
- D2.00
Explanation
Sharpe ratio = (Rp − Rf) / SD = (14 − 6) / 16 = 0.50. 0.875 results from dividing the total return by SD without subtracting Rf. 2.00 inverts the ratio. Check: 0.50 × 16 = 8, the excess return.
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