NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
A portfolio has an expected return of 14%, a standard deviation of 20% and the risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 0.40. It equals excess return over the risk-free rate divided by total risk: (14% - 6%) / 20% = 0.40. It shows the reward earned per unit of total risk taken by the portfolio.
- A0.70
- B0.40Correct
- C0.30
- D2.50
Explanation
Sharpe ratio = (14% - 6%) / 20% = 8/20 = 0.40. The 0.70 option divides the return by the standard deviation without subtracting the risk-free rate (14/20). The 2.50 option inverts the ratio (20/8).
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