CFA Practice Question

There are 136 practice questions for this study session.

CFA Practice Question

Investor A puts all his money in a mutual fund. Investor B puts 30% of his equity in cash and the remaining 70% in the same fund. Which portfolio is expected to have a higher Sharpe ratio?

A. A
B. B
C. They have the same Sharpe ratio.
Correct Answer: C

Sharpe ratio is unaffected by the addition of cash or leverage in a portfolio.

User Contributed Comments 4

User Comment
1003669 How?
morel-san It's the return per unit of risk undertaken. It means that what ever amount you put into the mutual fund, you'll only be attributed a proportionate amount of risk. The more money is in the mutual fund, the higher your standard deviation and vice versa. It doesn't really matter what amount you put in actually.
morel-san They'll have the same Sharpe but their Standard deviation will be different
davidt87 morel-san, their std. dev. AND their return will be adjusted proportionally so that the Sharpe ratio is unaffected
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