NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
Mr. Iyer's equity portfolio returned 14% in a year. The risk-free rate was 6%, the portfolio's standard deviation was 16%, and its beta was 1.25. What is the Sharpe ratio of the portfolio?
The Sharpe ratio is excess return divided by standard deviation. Here the excess return is 14% minus 6%, which is 8%. Dividing by the 16% standard deviation gives 0.50. Beta is not used in the Sharpe ratio.
- A0.50Correct
- B0.64
- C0.875
- D0.38
Explanation
Sharpe = (14 - 6) / 16 = 8/16 = 0.50. The option 0.64 is the Treynor ratio in percentage terms (8/1.25 = 6.4), mistakenly scaled. The option 0.875 comes from 14/16, which ignores the risk-free rate. The option 0.38 uses 6/16, which is the risk-free rate rather than excess return.
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