NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
Portfolio A has a return of 15%, standard deviation of 20% and beta of 1.2. The risk-free rate is 6%. What is the Sharpe ratio of Portfolio A?
The Sharpe ratio is 0.45. It is the excess return over the risk-free rate, 15% minus 6% equals 9%, divided by the portfolio's standard deviation of 20%. Beta is not used because Sharpe measures return per unit of total risk.
- A0.45Correct
- B0.75
- C0.30
- D0.50
Explanation
Sharpe ratio = (Rp − Rf) / standard deviation = (15 − 6) / 20 = 0.45. Using beta in the denominator gives 7.5 (Treynor-type measure, not Sharpe). Dividing the raw return 15 by 20 gives 0.75, which ignores the risk-free rate. 0.30 is not obtained from the data.
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