NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
Asset A has an expected return of 12% and the risk-free rate is 6%. If the standard deviation of A is 15%, what is its Sharpe ratio?
The Sharpe ratio is 0.40. It measures excess return per unit of total risk, so subtract the 6% risk-free rate from the 12% return to get 6%, then divide by the 15% standard deviation. This gives 0.40.
- A0.40Correct
- B0.80
- C0.50
- D1.20
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (12 - 6) / 15 = 0.40. Using 12/15 gives 0.80, which ignores the risk-free rate. Using 6/12 gives 0.50, which uses the wrong denominator. 1.20 is an arbitrary miscalculation.
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