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

Two equity diversified funds follow the same benchmark. Fund A has a standard deviation of 14% and a return of 15%. Fund B has a standard deviation of 18% and a return of 15%. The risk-free rate is 6%. Which statement is correct about their Sharpe ratios?

Fund A is better, with a Sharpe ratio of about 0.64 against 0.50 for Fund B. Sharpe ratio is excess return over the risk-free rate divided by standard deviation, so for the same return the fund with lower volatility gives better risk-adjusted performance.

  1. AFund A has a Sharpe ratio of 0.64 and is betterCorrect
  2. BFund B has a Sharpe ratio of 0.50 and is better
  3. CBoth have equal Sharpe ratios because returns are equal
  4. DFund A has a Sharpe ratio of 1.07 and is better

Explanation

Sharpe = (Return - risk-free)/standard deviation. Fund A: 9/14 = 0.64. Fund B: 9/18 = 0.50. A higher ratio means better risk-adjusted return, so Fund A is better. Equal returns do not mean equal ratios as risk differs.

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