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CMA Final · Strategic Financial Management · Portfolio Theory and Practice

A portfolio has an expected return of 15%, standard deviation of 12% and beta of 1.2. The risk-free rate is 6% and the market return is 12% with a standard deviation of 10%. What is the Sharpe ratio of the portfolio, and how does it compare with the market's Sharpe ratio?

The portfolio's Sharpe ratio is 0.75, calculated as excess return of 9% divided by standard deviation of 12%. The market's ratio is 6% divided by 10%, or 0.60. So the portfolio delivers better return per unit of total risk than the market.

  1. A0.75 for the portfolio, which is above the market's 0.60Correct
  2. B0.75 for the portfolio, which is equal to the market's 0.75
  3. C0.60 for the portfolio, which is below the market's 0.75
  4. D1.25 for the portfolio, which is above the market's 0.60

Explanation

Portfolio Sharpe = (15-6)/12 = 0.75. Market Sharpe = (12-6)/10 = 0.60. The portfolio therefore outperforms the market on total risk-adjusted basis. Other options misstate one or both ratios.

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