CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio manager at a Mumbai fund earned an average return of 14% with a standard deviation of 10% and a beta of 0.8. The risk-free rate is 6%. What is the Sharpe ratio of the portfolio?
The Sharpe ratio is 0.80. It equals the excess return over the risk-free rate, 14% minus 6% which is 8%, divided by the total risk measured by the standard deviation of 10%. Beta is not used because Sharpe measures return per unit of total risk.
- A0.80Correct
- B1.00
- C0.60
- D1.40
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 10 = 0.80. The option 1.00 wrongly divides by beta-like 0.8 (8/8), and 0.60 uses the wrong excess return base. Option 1.40 divides the raw return by the standard deviation without deducting Rf.
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