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

A fund has a 3-year return of 15% p.a., the risk-free rate is 6%, and its standard deviation is 18%. Another fund returned 13% p.a. with a standard deviation of 10%. Using the Sharpe ratio, which statement is correct?

The second fund has the higher Sharpe ratio. The first fund scores (15-6)/18 = 0.50, while the second scores (13-6)/10 = 0.70. The second therefore earns more excess return over the risk-free rate per unit of volatility, despite a lower absolute return.

  1. AThe second fund has the higher Sharpe ratio, 0.70 against 0.50Correct
  2. BThe first fund has the higher Sharpe ratio, 0.83 against 0.70
  3. CBoth have a Sharpe ratio of 0.50
  4. DThe second fund has a Sharpe ratio of 1.30

Explanation

Sharpe = (return - risk-free)/standard deviation. First fund: (15-6)/18 = 0.50. Second fund: (13-6)/10 = 0.70. So the second fund gives more excess return per unit of risk, despite the lower absolute return.

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