Question

You manage an equity fund with an expected risk premium of 12.6% and a standard deviation of 40%. The rate on Treasury bills is 6.4%. Your client chooses to invest $75,000 of her portfolio in your equity fund and $75,000 in a T-bill money market fund. What is the reward-to-volatility (Sharpe) ratio for the equity fund?

Answer 1

Reward to Volatility Ratio = 31.50%

Step-by-step explanation:

given data

expected risk premium = 12.6%

Treasury bills = 6.4%

invest = $75,000

solution

we know that Reward to Volatility Ratio is express as

Reward to Volatility Ratio = (Expected Portfolio Return - Risk Free Rate) ÷ Standard Deviation ........................1

so here Expected portfolio Return is

Expected portfolio Return = Risk Free Return + Risk Premium

Expected portfolio Return = 6.40% + 12.60%

Expected portfolio Return = 19%

so

Reward to Volatility Ratio =
`(0.19 - 0.0640)/(0.40)`

Reward to Volatility Ratio =0.315

Reward to Volatility Ratio = 31.50%