An investment portfolio has a gross annual return of 14%, a management fee of 2%,...

The Sharpe ratio measures the portfolio’s excess return over the risk-free rate for each unit of total volatility. Because the question requires the ratio after fees , the management fee must first be deducted from the gross return.

Net portfolio return:

14% − 2% = 12%

Excess return above the risk-free rate:

12% − 3% = 9%

Sharpe ratio:

9% ÷ 8% = 1.125

Rounded to two decimal places, the Sharpe ratio is 1.13 , making option D correct.

Option A, 1.38, would result from incorrectly using the gross return: (14% − 3%) ÷ 8% = 1.375. That calculation ignores the explicit instruction to calculate performance after management fees. The other options do not result from the prescribed Sharpe-ratio calculation.

A higher positive Sharpe ratio generally indicates that the portfolio generated more excess return per unit of total risk. However, it should be interpreted using a consistent period, return methodology and risk-free benchmark. The CIRO Retail Securities syllabus requires candidates to analyze fees and charges affecting client returns and calculate risk-adjusted performance measures, specifically including the Sharpe ratio and standard deviation.

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