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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds

Fund A has an annual return of 14%, a standard deviation of 10% and a beta of 0.8. Fund B has an annual return of 16%, a standard deviation of 16% and a beta of 1.2. The risk-free rate is 6%. Which comparison is correct on the Sharpe ratio?

Fund A has the better Sharpe ratio. Fund A scores (14-6)/10 = 0.80, and Fund B scores (16-6)/16 = 0.625. A higher Sharpe ratio means more excess return per unit of total risk, so Fund A is preferred despite its lower return.

  1. AFund A is 0.80 and Fund B is 0.625, so Fund A is betterCorrect
  2. BFund A is 1.4 and Fund B is 1.0, so Fund A is better
  3. CFund A is 0.80 and Fund B is 0.625, so Fund B is better
  4. DFund A is 10 and Fund B is 8.33, so Fund A is better

Explanation

Sharpe = (return - risk-free) / standard deviation. Fund A: (14-6)/10 = 0.80. Fund B: (16-6)/16 = 0.625. Higher is better, so Fund A gives more excess return per unit of total risk. The 1.4 and 1.0 option wrongly omits the risk-free deduction.

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