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Answer: 0.75
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: $$SPI = \frac{E(R_p) - R_f}{\sigma(R_p)}$$ where: - $E(R_p)$ = Expected return of the portfolio = 8.5% - $R_f$ = Risk-free rate = 4% - $\sigma(R_p)$ = Standard deviation (volatility) of the portfolio = 6% $$SPI = \frac{8.5\% - 4\%}{6\%} = \frac{4.5\%}{6\%} = 0.75$$ 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.
Author: Tanishq Prabhu
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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?
A
0.75
B
0.036
C
0.025
D
0.65
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