NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
A portfolio has an expected return of 14%, a standard deviation of 10%, and the risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 0.80. It equals the portfolio return minus the risk-free rate, which is 14 minus 6, or 8 percent, divided by the standard deviation of 10 percent. It shows excess return earned per unit of total risk.
- A0.60
- B0.80Correct
- C1.40
- D0.08
Explanation
Sharpe ratio = (14 - 6)/10 = 0.80. Using 14/10 = 1.40 forgets to subtract the risk-free rate. 0.60 divides 6 by 10, and 0.08 is excess return expressed in decimals rather than per unit of risk.
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