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

Over a year, Scheme A earned 14% with a standard deviation of 10%, while the risk-free rate was 6%. Scheme B earned 16% with a standard deviation of 16%. Using the Sharpe ratio, which statement is correct?

Scheme A is better. Its Sharpe ratio is (14-6)/10 = 0.8, while Scheme B's is (16-6)/16 = 0.625. Sharpe measures excess return over the risk-free rate per unit of total risk, so the higher figure signals better risk-adjusted performance despite B's higher raw return.

  1. AScheme B is better because its return is higher
  2. BScheme A has a Sharpe ratio of 0.8 and Scheme B has 0.625, so A gave better risk-adjusted returnCorrect
  3. CScheme A has a Sharpe ratio of 1.4 and Scheme B has 1.0, so A is better
  4. DBoth schemes have the same Sharpe ratio

Explanation

Sharpe = (return - risk-free) / standard deviation. A: (14 - 6)/10 = 0.8. B: (16 - 6)/16 = 0.625. A is better on risk-adjusted basis. Option 3 wrongly omits the risk-free rate from the numerator.

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