NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A portfolio returned 14% with a standard deviation of 10%. The risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 0.8. It is computed as the portfolio return minus the risk-free rate, which is 8%, divided by the total risk measured by standard deviation of 10%. It shows excess return earned per unit of total risk.
- A1.4
- B0.6
- C0.8Correct
- D1.0
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 10 = 0.8. The 1.4 option divides the raw return by the standard deviation without subtracting the risk-free rate. The 0.6 option divides the risk-free rate by the standard deviation.
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