NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds
Fund A has a return of 14%, a standard deviation of 10% and a beta of 1.0. The risk-free rate is 6%. What is its Sharpe ratio?
The Sharpe ratio is 0.80. It measures excess return over the risk-free rate per unit of total risk, so the 8% excess return (14% minus 6%) is divided by the 10% standard deviation. Beta is irrelevant to this measure.
- A1.40
- B0.80Correct
- C0.60
- D8.00
Explanation
Sharpe ratio = (Rp - Rf) / standard deviation = (14 - 6) / 10 = 0.80. Using 14/10 = 1.40 forgets to subtract the risk-free rate. 0.60 divides 6 by 10, and 8.00 omits the division by risk.
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