Sharpe Ratio

This problem practices a core concept in portfolio performance analysis, the idea of measuring returns relative to the risk taken to achieve them. A candidate needs to understand what is meant by excess return, how a risk-free benchmark is used, and why standard deviation is often used as a proxy for volatility in risk-adjusted performance measures. It also tests whether the candidate can explain the intuition behind comparing different investments on a like-for-like basis, which is a common theme in hedge fund and asset management discussions.

Interviewers ask this because the Sharpe ratio is one of the most widely cited ways to judge whether a strategy is producing enough return for its level of risk. They also want to see awareness of its limitations, especially that not all risk is captured equally and that downside risk can matter more than overall volatility. This opens the door to discussing alternative measures and shows that the candidate understands both the usefulness and the shortcomings of a standard performance metric.