CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio manager at a Mumbai AMC earned a return of 14% on a portfolio during the year. The risk-free rate was 6% and the portfolio's standard deviation was 16%. What is the Sharpe ratio of the portfolio?
The Sharpe ratio is 0.50. It equals the excess return over the risk-free rate, 14% minus 6% = 8%, divided by the portfolio standard deviation of 16%. It measures reward per unit of total risk, so the risk-free rate must be deducted first.
- A0.50Correct
- B0.875
- C0.57
- D2.00
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 8/16 = 0.50. The option 0.875 comes from dividing the total return by the standard deviation (14/16) without deducting the risk-free rate. The option 0.57 wrongly divides the excess return by the total return (8/14).
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