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

A fund returned 14% in a year with a standard deviation of 10% and a beta of 1.2. The risk-free rate is 6%. Using the Sharpe ratio, what is the fund's risk-adjusted performance, and how does it compare with a peer fund having a Sharpe ratio of 0.70?

The Sharpe ratio is 0.80, calculated as excess return of 8% (14% minus 6%) divided by the 10% standard deviation. This is higher than the peer's 0.70, so the fund gave better return per unit of total risk.

  1. A0.80; better than the peerCorrect
  2. B0.70; same as the peer
  3. C1.00; better than the peer
  4. D0.67; worse than the peer

Explanation

Sharpe ratio = (14% - 6%) / 10% = 0.80. Since 0.80 exceeds 0.70, the fund delivered more excess return per unit of total risk. Using beta (8/1.2 = 6.67, the Treynor measure) is a mistake because Sharpe uses standard deviation.

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