Financial Risk Manager Part 1
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The standard deviation of a portfolio is 15%. If the portfolio's return is 22%, and the risk-free return is 6%, then what is the Sharpe ratio of the portfolio?
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TTanishq
Explanation:
The Sharpe ratio is calculated as:
Sharpe Ratio = (Portfolio Return - Risk-Free Return) / Standard Deviation of Portfolio
Given:
- Portfolio return = 22%
- Risk-free return = 6%
- Standard deviation = 15%
Calculation: Sharpe Ratio = (22% - 6%) / 15% = 16% / 15% = 1.07
This means the portfolio generates 1.07 units of excess return per unit of risk (standard deviation). The Sharpe ratio is a key risk-adjusted performance measure in portfolio management.
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