NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A portfolio manager's portfolio returned 14% in a year, the risk-free rate was 6%, and the portfolio's standard deviation was 16%. What is its Sharpe ratio?
The Sharpe ratio is 0.50. It equals the excess return over the risk-free rate (14% minus 6%, which is 8%) divided by the portfolio's standard deviation of 16%, so it measures excess return earned per unit of total risk.
- A0.50Correct
- B0.875
- C0.38
- D1.75
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 8/16 = 0.50. The 0.875 option divides by the return rather than the risk (14 - 6 = 8; 14/16 = 0.875). The 0.38 option subtracts the wrong figure. The 1.75 option divides the raw return by the risk-free rate, ignoring excess return and risk.
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