medium · FRM Part 1 Foundations of Risk Management
A portfolio has a Sharpe ratio of 0.50. If the investor adds leverage by borrowing at the risk-free rate to double their exposure to the portfolio, what happens to the Sharpe ratio of the levered position (ignoring transaction costs)?
- It decreases because the cost of borrowing reduces the excess return.
- It remains unchanged at 0.50.
- It doubles to 1.00.
- It increases because the higher return outweighs the linear increase in volatility.
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