A portfolio has an excess return of 10%, standard deviation of 8%. What is the Sharpe ratio?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

A portfolio has an excess return of 10%, standard deviation of 8%. What is the Sharpe ratio?

Explanation:
The Sharpe ratio shows how much excess return you earn for each unit of risk, calculated as the portfolio’s excess return divided by its standard deviation. With an excess return of 10% and a standard deviation of 8%, the ratio is 0.10 ÷ 0.08 = 1.25. This means for every unit of risk taken, you gain 1.25 units of excess return, indicating strong risk-adjusted performance. The other values would come from using different inputs or reversing numerator and denominator (for example 8% ÷ 10% = 0.8 or 12% ÷ 8% = 1.5), but with the given inputs the correct Sharpe ratio is 1.25.

The Sharpe ratio shows how much excess return you earn for each unit of risk, calculated as the portfolio’s excess return divided by its standard deviation. With an excess return of 10% and a standard deviation of 8%, the ratio is 0.10 ÷ 0.08 = 1.25. This means for every unit of risk taken, you gain 1.25 units of excess return, indicating strong risk-adjusted performance. The other values would come from using different inputs or reversing numerator and denominator (for example 8% ÷ 10% = 0.8 or 12% ÷ 8% = 1.5), but with the given inputs the correct Sharpe ratio is 1.25.

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