CA Final · Advanced Financial Management · Mutual Funds
A mutual fund scheme earned an average annual return of 14% with a standard deviation of 10%. The risk-free rate is 6%. What is the Sharpe ratio of the scheme?
The Sharpe ratio is 0.80. It is computed as excess return over the risk-free rate, 14% minus 6% equals 8%, divided by the total risk measured by standard deviation of 10%. Using the raw return of 14% instead would wrongly give 1.40.
- A0.80Correct
- B1.40
- C0.60
- D0.57
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 10 = 0.80. Option 1.40 divides the raw return by the standard deviation without deducting the risk-free rate. Option 0.60 uses Rf/SD.
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