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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance

Fund A has a return of 14%, standard deviation 10% and beta 1.0. The risk-free rate is 6%. Fund B has a return of 16%, standard deviation 20% and beta 1.25. Considering the Sharpe ratio, which statement is correct?

Fund A has the higher Sharpe ratio, 0.80 against 0.50 for Fund B. Sharpe equals excess return over the risk-free rate divided by standard deviation: (14-6)/10 for A and (16-6)/20 for B. A higher raw return does not mean better risk-adjusted performance.

  1. AFund B has the higher Sharpe ratio of 0.80 versus 0.50 for Fund A
  2. BFund A and Fund B have equal Sharpe ratios
  3. CFund B has the higher Sharpe ratio because its return is higher
  4. DFund A has the higher Sharpe ratio of 0.80 versus 0.50 for Fund BCorrect

Explanation

Sharpe = (return - risk-free) / standard deviation. Fund A = (14-6)/10 = 0.80. Fund B = (16-6)/20 = 0.50. Fund A earns more excess return per unit of total risk, although Fund B has the higher absolute return.

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