You manage an equity fund with an expected risk premium of 9% and a standard deviation of 12%. The rate on Treasury bills is 4%. Your client chooses to invest $50,000 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?

0.75%

Explanation:

Computation for reward-to-volatility (Sharpe) ratio for the equity fund

Using this formula

Reward to volatility ratio =Portfolio risk premium÷Standard deviation of portfolio excess return

Where ,

Portfolio risk premium =9%

Standard deviation of portfolio excess return=12%

Let plug in the formula

Reward to volatility ratio =0.09/0.12

Reward to volatility ratio =0.75%

Therefore reward-to-volatility (Sharpe) ratio for the equity fund will be 0.75%

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