According to the Sharpe Ratio, which of the following portfolios demonstrates superior risk-adjusted performance?

Question: According to the Sharpe Ratio, which of the following portfolios demonstrates superior risk-adjusted performance?

Answer options:

• Portfolio A: Return 12%, Standard Deviation 8%, Risk-Free Rate 3%
• Portfolio B: Return 15%, Standard Deviation 12%, Risk-Free Rate 3% ✅ Portfolio C: Return 10%, Standard Deviation 5%, Risk-Free Rate 3%
• Portfolio D: Return 18%, Standard Deviation 15%, Risk-Free Rate 3%

Correct answer: Portfolio C: Return 10%, Standard Deviation 5%, Risk-Free Rate 3%

Explanation: The Sharpe Ratio is calculated as (Portfolio Return - Risk-Free Rate) / Standard Deviation. For Portfolio A: (12-3)/8 = 1.125. For Portfolio B: (15-3)/12 = 1.0. For Portfolio C: (10-3)/5 = 1.4. For Portfolio D: (18-3)/15 = 1.0. Portfolio C has the highest Sharpe Ratio.