Skip to content

NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

A portfolio has a return of 14%, a standard deviation of 20% and a beta of 1.2. The risk-free rate is 6%. What is its Sharpe ratio?

The Sharpe ratio is 0.40. Subtract the 6% risk-free rate from the 14% return to get 8% excess return, then divide by the 20% standard deviation. Beta is not used, because Sharpe measures excess return per unit of total risk.

  1. A0.40Correct
  2. B0.67
  3. C0.33
  4. D0.45

Explanation

Sharpe ratio = (Rp − Rf) / standard deviation = (14 − 6) / 20 = 0.40. The 0.67 option is the Treynor ratio (8/1.2 = 6.67 percentage points, expressed as 0.067) wrongly confused with Sharpe, and it uses beta instead of standard deviation. Sharpe uses total risk.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Performance Measurement and Evaluation shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Performance Measurement and EvaluationFree diagnostic mock

More Portfolio Performance Measurement and Evaluation questions