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CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II

Portfolio A has an annual return of 12%, a standard deviation of 15% and a beta of 1.2. The risk-free rate is 3%. The Sharpe ratio of Portfolio A is closest to:

The Sharpe ratio is the excess return over the risk-free rate divided by total standard deviation. Here (12% - 3%) / 15% gives 0.60. Using beta in the denominator would give the Treynor measure, and ignoring the risk-free rate overstates the ratio at 0.80.

  1. A0.60Correct
  2. B0.75
  3. C0.80

Explanation

Sharpe ratio = (12% - 3%) / 15% = 0.60. The value 0.75 results from dividing excess return by beta (9/1.2), which is the Treynor ratio in percent, and 0.80 results from dividing total return by standard deviation (12/15) without subtracting the risk-free rate.

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