CA Final · Advanced Financial Management · Mutual Funds
A mutual fund scheme earned an average annual return of 16% with a standard deviation of 20%. The risk-free rate is 6% and the scheme's beta is 1.25. What is the Sharpe ratio of the scheme?
The Sharpe ratio is 0.50. It is the excess return over the risk-free rate, 16% minus 6% equal to 10%, divided by the total risk measured by the standard deviation of 20%. Beta is not used in Sharpe's measure.
- A0.50Correct
- B0.80
- C0.08
- D0.13
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (16 - 6) / 20 = 0.50. The option 0.08 results from dividing the excess return by beta (10/1.25), which is the Treynor ratio, not Sharpe. Sharpe uses total risk, not systematic risk.
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