Sharpe Ratio Calculation - Quant Trader Interview Question
Difficulty: Easy
Category: Finance
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Topics: sharpe-ratio, risk-adjusted-return, portfolio-performance
Problem Description
You are evaluating a portfolio's performance. The portfolio has an average annual return of 10%, and its volatility (standard deviation) is 16%. The annual risk-free rate is 2%. What is the Sharpe Ratio of this portfolio?
Remember that the Sharpe Ratio is calculated as:
$Sharpe Ratio = \frac{R_p - R_f}{\sigma_p}$ where:
- $R_p$ is the portfolio return
- $R_f$ is the risk-free rate
- $\sigma_p$ is the portfolio's standard deviation (volatility)
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