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Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 10%.The efficient (tangent)portfolio has an expected return of 17% and a volatility of 12%.The risk-free rate of interest is 5%.
-The Sharpe ratio for your portfolio is closest to:
A)1.2.
B)0.6.
C)1.0.
D)0.7.

Question

Quizplus · Accepted Answer

The Sharpe ratio is defined as:
Sharpe ratio = (Portfolio expected return – Risk-free rate) / Portfolio volatility

Portfolio expected return = 12%
Portfolio volatility = 10%
Risk-free rate = 5%

Sharpe ratio for current portfolio:
Sharpe ratio = (0.12 - 0.05) / 0.10 = 0.7

Sharpe ratio for efficient portfolio:
Sharpe ratio = (0.17 - 0.05) / 0.12 =1.0

Therefore, the Sharpe ratio for your portfolio is closest to 0.7, which is option D. However, keep in mind that the efficient portfolio has a higher Sharpe ratio, indicating that it is a better investment choice.

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