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

Sharpe Ratio = (Mean Portfolio Return Risk-Free Rate)/Standard Deviation Of Portfolio Return

This is the required formula for the calculation Where expected risk premium of 12.2% is the Mean portfolio return as this value is the same as expected risk premium one gets from investing. Risk-free rate is the rate on treasury bills and standard deviation of the portfolio is provided directly in the question.

Now, substituting the values in the question we will get the Reward to volatility ratio or sharpe ratio as

Sharpe Ratio = (Mean Portfolio Return Risk-Free Rate)/Standard Deviation Of Portfolio Return

This is the required formula for the calculation Where expected risk premium of 12.2% is the Mean portfolio return as this value is the same as expected risk premium one gets from investing. Risk-free rate is the rate on treasury bills and standard deviation of the portfolio is provided directly in the question.

Now, substituting the values in the question we will get the Reward to volatility ratio or sharpe ratio as

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