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

A fund has an annual return of 14%, a standard deviation of 10% and a beta of 1.25. The risk-free rate is 6%. What is its Sharpe ratio?

The Sharpe ratio is 0.80. It equals the excess return over the risk-free rate (14% minus 6% = 8%) divided by the standard deviation of 10%. Using beta in the denominator would give the Treynor ratio of 6.4, not the Sharpe ratio.

  1. A0.80Correct
  2. B1.40
  3. C0.64
  4. D0.60

Explanation

Sharpe ratio = (Fund return - risk-free rate) / standard deviation = (14 - 6) / 10 = 0.80. The 0.64 option is the Treynor ratio (8/1.25), which uses beta. The 1.40 option fails to deduct the risk-free rate (14/10).

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