Chartered Investment Manager (CIM) Practice Exam · Question
An investment advisor calculates a portfolio's Sharpe ratio and observes that it is lower than the benchmark's Sharpe ratio. What does this suggest about the portfolio's performance?
The Sharpe ratio measures excess return per unit of total risk (standard deviation). A lower Sharpe ratio compared to a benchmark indicates that the portfolio g
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Question: An investment advisor calculates a portfolio's Sharpe ratio and observes that it is lower than the benchmark's Sharpe ratio. What does this suggest about the portfolio's performance?
Answer options: ✅ The portfolio underperformed the benchmark on a risk-adjusted basis.
- The portfolio generated higher absolute returns than the benchmark.
- The portfolio took on less total risk than the benchmark.
- The portfolio had a lower beta than the benchmark.
Correct answer: The portfolio underperformed the benchmark on a risk-adjusted basis.
Explanation: The Sharpe ratio measures excess return per unit of total risk (standard deviation). A lower Sharpe ratio compared to a benchmark indicates that the portfolio generated less return for the amount of risk taken.
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