CA Final · Advanced Financial Management · Portfolio Management
Sundaram Asset Managers reports that its Balanced Fund earned an average return of 14% with a standard deviation of 16%. The risk-free rate is 6%. What is the Sharpe ratio of the fund?
The Sharpe ratio is 0.5. It measures excess return per unit of total risk, so the 8% excess return over the 6% risk-free rate is divided by the 16% standard deviation. Using the raw 14% return without deducting the risk-free rate would overstate it.
- A0.500Correct
- B0.875
- C2.000
- D0.375
Explanation
Sharpe ratio = (Rp - Rf) / sigma p = (14 - 6) / 16 = 0.5. The 0.875 option forgets to subtract the risk-free rate (14/16). The 0.375 option uses only the risk-free rate (6/16). The 2.0 option inverts the ratio.
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