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Answer: 0.558
**Correct Answer: D** **Explanation:** The Sharpe ratio is calculated as: $$\text{Sharpe Ratio} = \frac{\text{Portfolio Return} - \text{Risk-Free Rate}}{\text{Portfolio Volatility}}$$ Given: - Expected return of portfolio = 8.7% - Risk-free rate = 2.0% - Volatility of returns of portfolio = 12.0% Calculation: $$\text{Sharpe Ratio} = \frac{8.7\% - 2.0\%}{12.0\%} = \frac{6.7\%}{12.0\%} = 0.5583$$ The Sharpe ratio measures the excess return per unit of risk (volatility) and is a key performance metric in portfolio management.
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An analyst is evaluating the performance of a portfolio of Mexican equities that is benchmarked to the IPC Index. The analyst collects the information about the portfolio and the benchmark index, shown below:
| Expected return of the portfolio | 8.7% |
|---|---|
| Volatility of returns of the portfolio | 12.0% |
| Expected return of the IPC | 4.0% |
| Volatility of returns of the IPC | 8.7% |
| Risk-free rate of return | 2.0% |
| Beta of portfolio relative to IPC | 1.4% |
What is the Sharpe ratio of this portfolio?
A
0.036
B
0.047
C
0.389
D
0.558