NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
Portfolio A has a return of 15%, standard deviation of 20% and beta of 1.2. The risk-free rate is 6%. What is its Sharpe ratio, and which risk measure does it use?
The Sharpe ratio is excess return divided by standard deviation: (15% - 6%) / 20% = 0.45. It uses total risk, unlike the Treynor ratio, which uses beta as systematic risk.
- A0.45, using total riskCorrect
- B0.75, using total risk
- C0.45, using systematic risk
- D0.075, using total risk
Explanation
Sharpe = (15% - 6%) / 20% = 0.45, and it divides by standard deviation, which is total risk. Dividing by beta gives the Treynor ratio, 9/1.2 = 7.5, which is a different measure. 0.75 arises from dividing 15 by 20, forgetting to deduct the risk-free rate.
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