Question

You manage an equity fund with an expected risk premium of 11.2% and a standard deviation of 26%. The rate on Treasury bills is 4.2%. Your client chooses to invest $70,000 of her portfolio in your equity fund and $30,000 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

Solution:
	Reward-to-volatility ratio	0.4308
Working Notes:
	Reward-to-volatility ratio for the equity fund
	= (return of equity fund - risk free rate)/Standard deviation of Equity fund
	= expected risk premium /Standard deviation of Equity fund
	= 11.2% /26%
	= 0.430769231
	= 0.4308
Notes:	Question is clearly asking Reward-to-volatility ratio for the equity fund not for Client portfolio.
Please feel free to ask if anything about above solution in comment section of the question.