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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

A distributor compares two equity funds over the same three years. Fund X has a return of 15%, standard deviation of 10% and beta 1.0. Fund Y has a return of 14%, standard deviation of 8% and beta 0.9. The risk-free rate is 6%. Which statement is correct on the basis of the Sharpe ratio?

Fund Y is better, with a Sharpe ratio of 1.00 against 0.90 for Fund X. Sharpe ratio is excess return over the risk-free rate divided by standard deviation, so Y delivers more excess return per unit of total risk despite its lower absolute return.

  1. AFund X is better, with a Sharpe ratio of 0.90 against 1.00 for Fund Y
  2. BFund Y is better, with a Sharpe ratio of 1.00 against 0.90 for Fund XCorrect
  3. CFund X is better, with a Sharpe ratio of 1.50 against 1.75 for Fund Y
  4. DBoth funds have the same Sharpe ratio

Explanation

Sharpe = (return - risk-free) / standard deviation. Fund X = (15-6)/10 = 0.90. Fund Y = (14-6)/8 = 1.00. Fund Y gives more excess return per unit of total risk, so it is better. Option 1 reverses the conclusion.

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