Skip to content

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

Scheme A returned 15% with a standard deviation of 10%. Scheme B returned 13% with a standard deviation of 6%. The risk-free rate is 7%. 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. Scheme A gives (15-7)/10 = 0.8, while Scheme B gives (13-7)/6 = 1.0. Although A earned a higher return, B earned more excess return per unit of risk taken.

  1. AScheme A is better, with a Sharpe ratio of 0.8 against 1.0
  2. BScheme B is better, with a Sharpe ratio of 1.0 against 0.8Correct
  3. CScheme A is better, with a Sharpe ratio of 1.5 against 1.0
  4. DBoth have the same Sharpe ratio of 1.0

Explanation

Scheme A: (15-7)/10 = 0.8. Scheme B: (13-7)/6 = 1.0. Scheme B gives more excess return per unit of risk, so it is better. Option A reverses the ratios, and option C uses the raw return divided by risk incorrectly.

Did you get it right without looking?

One question tells you little. A timed set on Risk, Return and Performance of Funds shows your real accuracy, how long you take and where you lose marks.

Practise Risk, Return and Performance of FundsFree diagnostic mock

More Risk, Return and Performance of Funds questions