CFA Level 1: Calculating Sharpe Measure of Risk-Adjusted Performance

Calculating Sharpe Measure

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Question

You are given a risk-free rate of 3% per year, a portfolio return of 8% per year, and a standard deviation of portfolio return of 22% per year. What is the Sharpe measure of risk-adjusted performance?

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A. B. C. D.

C

The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation of portfolio return. In our case, we have (8% - 3%) / 22% = 5/22 = 0.227.

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