Question

You manage an equity fund with an expected risk premium of 10.4% and a standard deviation of 18%. The rate on Treasury bills is 5%. Your client chooses to invest $45,000 of her portfolio in your equity fund and $55,000 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.)

Reward to volatility ratio?

Answer 1

Weight in equity, We = 45,000/(45,000 + 55,000) = 0.45

Weight in T-bill, Wt = 55,000/(45,000 + 55,000) = 0.55

Expected return of the portfolio, E(R) = We * re + Wt * rt

E(R) = 0.45 * 0.104 + 0.55 * 0.05

E(R) = 0.0743

The standard deviation of the portfolio = We * Standard deviation of equity fund

The standard deviation of the portfolio = 0.45 * 0.18

The standard deviation of the portfolio = 0.081