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)?

1. It decreases because the cost of borrowing reduces the excess return.
2. It remains unchanged at 0.50.
3. It doubles to 1.00.
4. It increases because the higher return outweighs the linear increase in volatility.

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