NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds
A scheme earned a return of 12% over a year while its risk-free rate was 6% and its standard deviation was 10%. What is its Sharpe ratio?
The Sharpe ratio is 0.60. It is calculated as the excess return over the risk-free rate, 12% minus 6% = 6%, divided by the standard deviation of 10%. It measures return earned per unit of total risk taken.
- A0.60Correct
- B1.20
- C1.80
- D0.50
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (12 - 6) / 10 = 0.60. Dividing the return by the standard deviation without subtracting the risk-free rate gives 1.20, which is wrong. The value 0.50 would come from dividing the excess return by the 12% return instead.
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