Financial Risk Manager Part 1
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You are evaluating the performance of a portfolio of Mexican equities that is benchmarked to the IPC Index. You collect the information about the portfolio and the benchmark index shown in the table below (2014):
| Item | Value |
|---|---|
| Expected return on the portfolio | 6.6% |
| Volatility of returns on the portfolio | 13.1% |
| Expected return on the IPC Index | 4.0% |
| Volatility of returns on the IPC Index | 8.7% |
| Risk-free rate of return | 1.5% |
| Beta of portfolio relative to IPC Index | 1.4 |
What is the Sharpe ratio for this portfolio? (Show computations and select the correct option.)
Exam-Like
UAnonymous
A
0.036
B
0.047
C
0.389
D
0.504
Explanation:
Sharpe ratio = (Expected portfolio return - Risk-free rate) / Portfolio volatility.
Compute: Excess return = 6.6% - 1.5% = 5.1% = 0.051 (decimal). Portfolio volatility = 13.1% = 0.131.
Sharpe = 0.051 / 0.131 = 0.389 (approximately).
Therefore the correct choice is C (0.389). Note: Beta and benchmark statistics are not needed to compute the Sharpe ratio.
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