NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance
Scheme A returned 14% with a standard deviation of 10% and Scheme B returned 12% with a standard deviation of 6%. The risk-free rate is 6%. Which statement is correct based on the Sharpe ratio?
Scheme B is better, with a Sharpe ratio of 1.0 against 0.8 for Scheme A. Sharpe divides excess return over the risk-free rate by standard deviation, so B delivers more excess return per unit of risk despite its lower absolute return.
- AScheme A is better, with Sharpe 0.8 versus 1.0
- BScheme B is better, with Sharpe 1.0 versus 0.8Correct
- CScheme A is better, with Sharpe 1.4 versus 2.0
- DBoth have equal Sharpe ratios of 0.8
Explanation
Sharpe = (return - risk-free)/standard deviation. A = (14-6)/10 = 0.8. B = (12-6)/6 = 1.0. B gives more excess return per unit of total risk, so B is better. The first option has the right numbers but picks the wrong scheme.
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