Performance Appraisal Using Sharpe Ratio

Medium Performance Evaluation Performance Appraisal

John is a portfolio manager at a mid-sized investment firm. Over the last year, he has managed a diversified portfolio with a capital allocation of $10 million. The portfolio's return was 12%, while the benchmark return was 10%. During a performance evaluation meeting, John's supervisor pointed out that although the portfolio outperformed its benchmark, it is essential to consider risk-adjusted returns and compare them to relevant benchmarks. The firm primarily uses the Sharpe ratio for performance appraisal.

Which of the following statements regarding John’s portfolio performance is correct?

The Sharpe ratio can be calculated as (12% - risk-free rate) / portfolio standard deviation.

The portfolio's raw return of 12% indicates it successfully managed market risk.

To accurately assess the portfolio's performance, both excess return and risk metrics must be considered.

Hint

Submitted2.4K

Correct2.0K

% Correct81%