FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
Manager A earned 9% with a volatility of 12%. Manager B earned 7% with a volatility of 6%. The risk-free rate is 3%. Which conclusion based on Sharpe ratios is correct?
Manager B has the higher Sharpe ratio. B's is (7% minus 3%) divided by 6%, or 0.67, while A's is (9% minus 3%) divided by 12%, or 0.50. B delivers more excess return per unit of total volatility despite lower absolute return.
- AA has the higher Sharpe ratio because its excess return is larger
- BThe managers have equal Sharpe ratios of 0.50
- CB has the higher Sharpe ratio, 0.67 versus 0.50Correct
- DB has the higher Sharpe ratio, 1.17 versus 0.75
Explanation
A: (9-3)/12 = 0.50. B: (7-3)/6 = 0.67. B earns more excess return per unit of total risk. Option 0 ignores risk. Option 3 fails to subtract the risk-free rate.
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