You manage an equity fund with an expected risk premium of 12.2% and a standard

Question

You manage an equity fund with an expected risk premium of 12.2% and a standard deviation of 36%. The rate on Treasury bills is 4.4%. Your client chooses to invest $90,000 of her portfolio in your equity fund and $110,000 in a T-bill money market fund. What is the reward-to-volatility ratio for the equity fund?

You manage an equity fund with an expected risk premium of 12.2% and a standard deviation of 36%. The rate on Treasury bills is 4.4%. Your client chooses to invest $90,000 of her portfolio in your equity fund and $110,000 in a T-bill money market fund. What is the reward-to-volatility ratio for the equity fund?

Explanation / Answer

Reward-to-Volatility ratio is also known as Sharpe Ratio. This is the excess return on an investment divided by the standard deviation from its average price. This can be used to determine the risk of an investment.

Sharpe Ratio = (Mean portfolio return Risk-free rate)/Standard deviation of portfolio return

Excess Return = 12.2%
Risk-free Rate = 4.4% (Treasury bills)
Portfolio Return = 12.2% + 4.4% = 16.6%
Standard Deviation = 36%

Reward-to-volatility ratio = (16.6% - 4.4%) / 36% = 0.3389

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.