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 16%, the risk-free rate is 7%, and the standard deviation of portfolio returns is 12%. What is the Sharpe ratio?
The Sharpe ratio is 0.75. It equals the excess return over the risk-free rate (16% minus 7%, i.e. 9%) divided by the portfolio's standard deviation of 12%. It measures return earned per unit of total risk.
- A0.75Correct
- B1.33
- C0.58
- D1.92
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (16 - 7) / 12 = 9 / 12 = 0.75. The 1.33 figure inverts the ratio, and 1.92 omits subtracting the risk-free rate in a different mix.
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