NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance
A scheme gave a return of 16% with a standard deviation of 8%. The risk-free rate is 6%. What is the Sharpe ratio?
The Sharpe ratio is 1.25. It equals the excess return over the risk-free rate, 16% minus 6% = 10%, divided by the standard deviation of 8%. It measures return earned per unit of total risk.
- A1.25Correct
- B2.00
- C0.50
- D1.60
Explanation
Sharpe ratio = (16 - 6) / 8 = 10/8 = 1.25. The 2.00 option divides the full return by standard deviation without deducting the risk-free rate, and 1.60 does... 16/10 is unrelated. Sharpe uses total risk, standard deviation, in the denominator.
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