CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio manager earned a return of 14% in a year. The risk-free rate was 6% and the standard deviation of portfolio returns was 16%. The portfolio's beta was 1.2 and the market return was 12%. What is the Sharpe ratio of the portfolio?
The Sharpe ratio is the portfolio's excess return over the risk-free rate divided by its total risk. Excess return is 14% minus 6%, equal to 8%, and dividing by the 16% standard deviation gives 0.50. Beta and market return are not needed here.
- A0.50Correct
- B0.88
- C0.67
- D0.75
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 0.50. Option 0.67 results from using beta-adjusted excess return incorrectly, and 0.75 results from dividing by 12 (market return) rather than the portfolio standard deviation of 16.
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