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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

A portfolio has an annual return of 14%, the risk-free rate is 6% and the standard deviation of the portfolio is 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 measures return earned per unit of total risk.

  1. A0.875
  2. B0.50Correct
  3. C1.00
  4. D0.375

Explanation

Sharpe ratio = (Rp - Rf)/standard deviation = (14 - 6)/16 = 8/16 = 0.50. Option 0.875 divides 14 by 16, forgetting to subtract the risk-free rate. Option 0.375 divides 6 by 16, which is the risk-free rate over the standard deviation, not excess return.

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