Financial Risk Manager Part 1
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Tom Peters has been evaluating the performance of his company's portfolio. He has the access to the below information.
| Portfolio's expected return | 8.5% |
|---|---|
| Risk-free rate | 4% |
| Beta of the portfolio | 1.25 |
| Return on the benchmark portfolio | 7% |
| Standard deviation of returns of the portfolio | 6% |
From the above information, the Sharpe Performance Index (SPI) is closest to?
Other
Community
TTanishq
A
0.75
B
0.036
C
0.025
D
0.65
Explanation:
The Sharpe Performance Index (SPI), also known as the Sharpe Ratio, measures the risk-adjusted return of a portfolio. To calculate the Sharpe Ratio, use the following formula:
where:
- = Expected return of the portfolio = 8.5%
- = Risk-free rate = 4%
- = Standard deviation (volatility) of the portfolio = 6%
The Sharpe Ratio of 0.75 indicates that for each unit of risk taken (as measured by standard deviation), the portfolio generates 0.75 units of excess return above the risk-free rate.
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