NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
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 the Sharpe ratio of the portfolio?
The Sharpe ratio is 0.50. It equals the portfolio's excess return over the risk-free rate, 14% minus 6% = 8%, divided by the standard deviation of 16%. It measures return earned per unit of total risk, so 8 divided by 16 gives 0.50.
- A0.50Correct
- B0.875
- C0.375
- D2.00
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 16 = 8/16 = 0.50. Check: 0.50 x 16 = 8, which equals the excess return. Option 0.875 comes from dividing the return by the standard deviation without subtracting the risk-free rate (14/16). Option 2.00 inverts the ratio.
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