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CMA Final · Strategic Financial Management · Portfolio Theory and Practice

The risk-free rate is 6%. A portfolio has an expected return of 14% and a standard deviation of 16%. What is the Sharpe ratio of the portfolio?

The Sharpe ratio is 0.50. It equals the portfolio's excess return over the risk-free rate, 14% minus 6% which is 8%, divided by the portfolio standard deviation of 16%. Forgetting to subtract the risk-free rate would wrongly give 0.875.

  1. A0.50Correct
  2. B0.875
  3. C0.375
  4. D2.00

Explanation

Sharpe ratio = (Rp - Rf) / σp = (14 - 6) / 16 = 8 / 16 = 0.50. The 0.875 option divides the return by the standard deviation without deducting the risk-free rate (14/16). The 2.00 option inverts the ratio.

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