A portfolio has a beta of 1.23 and a standard deviation of 11.6%. What is the Sharpe ratio if the market return is 12.4% and the market risk premium is 7.9%?
A).073
B).118
C).655
D).838
E).902

Question

Quizplus · Accepted Answer

First, we need to calculate the expected return of the portfolio using the market return and beta:

Expected return = risk-free rate + beta (market risk premium)
Expected return = 0 + 1.23(0.079)
Expected return = 0.09717 or 9.717%

Next, we can calculate the excess return of the portfolio:

Excess return = expected return - risk-free rate
Excess return = 0.09717 - 0
Excess return = 0.09717 or 9.717%

Finally, we can calculate the Sharpe ratio:

Sharpe ratio = excess return / standard deviation
Sharpe ratio = 0.09717 / 0.116
Sharpe ratio = 0.838

Therefore, the best choice is D with the Sharpe ratio of 0.838.

A Portfolio Has a Beta of 1