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?

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TTanishq

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:

$SPI = \frac{E(R_p) - R_f}{\sigma(R_p)}$

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.

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