NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance
A scheme returned 18% over a year, while its benchmark returned 14%. The scheme's standard deviation was 12% and its beta was 1.2. If the risk-free rate is 6%, what is the scheme's Sharpe ratio?
The Sharpe ratio is 1.00. It is the excess return over the risk-free rate, 18% minus 6% = 12%, divided by the scheme's standard deviation of 12%. Beta is not used in Sharpe, and the benchmark return is irrelevant.
- A1.00Correct
- B1.50
- C0.33
- D0.67
Explanation
Sharpe ratio = (scheme return - risk-free rate) / standard deviation = (18 - 6)/12 = 1.00. Dividing by beta instead gives the Treynor ratio (10). Using the benchmark return gives (14-6)/12 = 0.67, which is wrong.
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