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

A distributor is comparing two diversified equity funds for a client. Fund X returned 15% with a standard deviation of 10%, and Fund Y returned 14% with a standard deviation of 7%. The risk-free rate is 6%. Which statement is correct on Sharpe ratio?

Fund Y has the higher Sharpe ratio of about 1.14 against 0.90 for Fund X. Sharpe is excess return over the risk-free rate divided by standard deviation: (14-6)/7 for Y and (15-6)/10 for X, so Y is better risk-adjusted.

  1. AFund X has a higher Sharpe ratio, 0.90 versus 1.14
  2. BFund Y has a higher Sharpe ratio, 1.14 versus 0.90Correct
  3. CBoth have the same Sharpe ratio
  4. DFund X has a Sharpe ratio of 1.50 and Fund Y of 2.00

Explanation

Sharpe X = (15-6)/10 = 0.90. Sharpe Y = (14-6)/7 = 1.14. Y gives more excess return per unit of total risk. Option 1 reverses the ranking, and option 4 ignores the risk-free rate.

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