Skip to content

NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds

A fund earned a return of 14% in a year. The risk-free rate is 6%, the fund's standard deviation is 16% and its beta is 0.8. What is the fund's Sharpe ratio?

The Sharpe ratio is 0.50. It is calculated as the excess return over the risk-free rate, which is 14% minus 6% equals 8%, divided by the standard deviation of 16%. Beta is not used in the Sharpe ratio, since it relies on total risk.

  1. A0.50Correct
  2. B0.875
  3. C10.0
  4. D0.60

Explanation

Sharpe ratio = (fund return - risk-free rate) / standard deviation = (14 - 6) / 16 = 0.50. The value 0.875 divides the excess return by the return minus nothing but 16 wrongly applied inverted weights; it actually comes from 14/16. The value 10.0 is the Treynor ratio, 8/0.8, which uses beta instead of standard deviation. The value 0.60 has no basis in the data.

Did you get it right without looking?

One question tells you little. A timed set on Risk, Return and Performance of Funds shows your real accuracy, how long you take and where you lose marks.

Practise Risk, Return and Performance of FundsFree diagnostic mock

More Risk, Return and Performance of Funds questions