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 the risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 0.45. It is the excess return over the risk-free rate, 15% minus 6% equals 9%, divided by the standard deviation of 20%, giving 0.45 units of excess return per unit of total risk.
- A0.45Correct
- B0.75
- C0.30
- D2.50
Explanation
Sharpe ratio = (15% − 6%) / 20% = 9/20 = 0.45. Using 15/20 = 0.75 ignores the risk-free rate. Using 6/20 = 0.30 uses the risk-free rate instead of the excess return.
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