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

A fund has a standard deviation of 12% and a beta of 0.8 and returned 14% in a year when the risk-free rate was 6%. What is its Sharpe ratio, and what is the key point when comparing with a peer fund?

Sharpe ratio is (14% - 6%) divided by 12%, which equals 0.67. It uses standard deviation as total risk, and a higher value indicates better risk-adjusted return. It should be compared with funds in the same category and objective, not across unrelated schemes.

  1. A0.67; compare only with peers having similar objectives, as higher is better for risk-adjusted returnCorrect
  2. B1.17; a lower ratio is better
  3. C0.67; the ratio is meaningful only against the index beta
  4. D0.53; compare it with funds of any category

Explanation

Sharpe ratio = (14 - 6) / 12 = 8/12 = 0.67, using total risk (standard deviation), not beta. Beta-based 8/0.8 = 10 would be the Treynor measure. Higher Sharpe means better return per unit of risk, and comparisons are sensible among similar category funds.

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