NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A portfolio earned a return of 14% in a year while 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 computed as the excess return over the risk-free rate, 14 minus 6 equals 8 percent, divided by the portfolio standard deviation of 16 percent, giving 0.50 of excess return per unit of total risk.
- A0.50Correct
- B0.875
- C1.50
- D0.375
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 0.50. The value 0.875 divides the raw return by the standard deviation (14/16) and ignores the risk-free rate. The value 0.375 divides the risk-free rate by the standard deviation (6/16).
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