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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments

Asset X has expected return 14% with standard deviation 10%; the risk-free rate is 6%. Asset Y has expected return 12% with standard deviation 5%. Using the Sharpe ratio, which statement is correct?

Y is better. Its Sharpe ratio is (12-6)/5 = 1.2, while X's is (14-6)/10 = 0.8. Y delivers more excess return over the risk-free rate for each unit of total risk, even though X has a higher absolute return.

  1. AX is better, ratio 0.8 versus 1.2
  2. BY is better, ratio 1.2 versus 0.8Correct
  3. CY is better, ratio 2.4 versus 1.4
  4. DBoth have equal ratios

Explanation

Sharpe of X = (14-6)/10 = 0.8. Sharpe of Y = (12-6)/5 = 1.2. Y offers more excess return per unit of risk, so it is better. X looks attractive only on raw return.

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