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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Portfolio Management Process

A portfolio earned a return of 18% in a year. The risk-free rate is 6% and the portfolio's standard deviation is 15%. Its beta is 1.2 and the market return is 14%. What are its Sharpe ratio and Treynor ratio (in decimal terms)?

Sharpe ratio is 0.80 and Treynor ratio is 0.10. Excess return over the risk-free rate is 12%. Dividing by the standard deviation of 15% gives 0.80, and dividing by the beta of 1.2 gives 0.10, or 10%.

  1. ASharpe 0.80; Treynor 0.10Correct
  2. BSharpe 1.20; Treynor 0.15
  3. CSharpe 0.80; Treynor 0.15
  4. DSharpe 1.20; Treynor 0.10

Explanation

Excess return = 18% - 6% = 12%. Sharpe = 12/15 = 0.80 (uses standard deviation). Treynor = 12/1.2 = 10% or 0.10 (uses beta). The other options swap the denominators or use 18%/15% incorrectly.

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