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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Portfolio Management Process

Over a year, a portfolio earned a return of 14%, the risk-free rate was 6%, and the portfolio's standard deviation was 16%. What is its Sharpe ratio?

The Sharpe ratio is 0.50. It equals the 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 taken by the portfolio.

  1. A0.50Correct
  2. B0.875
  3. C0.38
  4. D2.00

Explanation

Sharpe ratio = (Rp - Rf)/standard deviation = (14 - 6)/16 = 0.50. The 0.875 comes from dividing the raw return by the standard deviation without deducting the risk-free rate (14/16). The 0.38 divides the risk-free rate by the standard deviation (6/16). The 2.00 inverts the ratio (16/8).

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