Question

You manage an equity fund with an expected risk premium of 10% and a standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund. What is the reward-to-volatility (Sharpe) ratio for the equity fund

Answer 1

Answer: 0.71

Step-by-step explanation:

The following can be deduced from the question:

Expected risk premium = 10%

Standard deviation = 14%.

Treasury bills rate = 6%.

The expected return of equity will be:

= 10% + 6%

= 16%

The reward to voltality ratio is calculated as:

(expected return - risk free rate )/standard deviation

= (16% -6%)/14%

= 10%/14%

=0.1/0.14

= 0.71