A foreign exchange trader indicates that he or she can make a predictable return of 10% per year in carry trade between Japanese yen and Australian dollars with a standard deviation of 50%. What is the Sharpe ratio for this carry trade?
A) 500%
B) 50%
C) 20%
D) 10%

Question

Quizplus · Accepted Answer

The Sharpe ratio is calculated as the excess return (in this case, 10%) divided by the standard deviation (50%). Therefore, the Sharpe ratio for this carry trade is 10%/50% = 0.2 or 20%.

A Foreign Exchange Trader Indicates That He or She Can