Question

you manage an equity fund with an expected risk premium of 13% and a standard deviation of 44%. the rate on treasury bills is 6.6%. your client chooses to invest $90,000 of her portfolio in your equity fund and $60,000 in a t-bill money market fund. what is the reward-to-volatility (sharpe) ratio for the equity fund? (round your answer to 4 decimal places.)

Answer 1

If your client chooses to invest $90,000 of her portfolio in your equity fund and $60,000 in a t-bill money market fund.  The reward-to-volatility (sharpe) ratio for the equity fund is: 0.2954.

Reward-to-volatility (sharpe) ratio

Using this formula to determine the reward-to-volatility (sharpe) ratio for the equity fund

Reward-to-volatility (sharpe) ratio = Portfolio risk premium / Standard Deviation

Where:

Portfolio risk premium = 13%

Standard Deviation = 44%

Let plug in the formula

Reward-to-volatility (sharpe) ratio = 13% / 44%

Reward-to-volatility (sharpe) ratio  = 0.2954

Therefore we can conclude that 0.2954 is the sharpe ratio.

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