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A portfolio manager is concerned about her ranking relative to other portfolio man- agers. In practice,...

A portfolio manager is concerned about her ranking relative to other portfolio man-
agers. In practice, portfolio managers are often evaluated by the Sharpe Ratio of their
portfolios. The risk free rate is 4% and the expected return on the market portfolio is
12%. The standard deviation of the expected return of the market is 12%. Suppose
that the portfolio manager has no special information or ability, and her objective is
to attain the highest possible Sharpe Ratio. If CAPM holds, what is the Sharpe Ratio
she should obtain?

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Answer #1

Sharpe ratio = [Portfolio return - risk free rate ]/standard deviation

                     = [.12 - .04] / .12

                     = .08/.12

                     = .66667   (rounded to .67)

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