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 was 6% and the fund's standard deviation was 16%. What is its Sharpe ratio?
The Sharpe ratio is 0.50. It equals the excess return over the risk-free rate, 14% minus 6% or 8%, divided by the standard deviation of 16%, giving the return earned per unit of total risk.
- A0.88
- B0.50Correct
- C0.375
- D0.125
Explanation
Sharpe ratio = (14 - 6) / 16 = 8/16 = 0.50. Using 14/16 = 0.875 ignores the risk-free rate, which is the key mistake in the 0.88 option. The other values do not follow from the formula.
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