NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection
A scheme has an annual return of 14%, a standard deviation of 10% and a beta of 0.8. The risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 0.80. It is calculated as the excess return over the risk-free rate, 14% minus 6% equals 8%, divided by the standard deviation of 10%. Beta is not used in the Sharpe ratio; it belongs to the Treynor ratio.
- A0.80Correct
- B0.60
- C1.40
- D1.00
Explanation
Sharpe ratio = (Return - Risk-free rate) / Standard deviation = (14 - 6) / 10 = 0.80. Using beta in the denominator would give 10 (Treynor, in percentage terms), and using total return without subtracting the risk-free rate gives 1.40.
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