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

Two equity funds have the same average return. Fund A has a standard deviation of 12% and Fund B has a standard deviation of 18%. What does this indicate?

Fund B's returns have been more volatile. Standard deviation measures how widely returns vary around their average, so with equal average returns, the fund with 18% standard deviation has experienced larger swings and carries greater total risk than the fund with 12%.

  1. AFund B's returns have been more volatile than Fund A'sCorrect
  2. BFund A has a higher beta than Fund B
  3. CFund B has a higher Sharpe ratio than Fund A
  4. DFund A's returns are guaranteed to be lower in future

Explanation

Standard deviation measures the dispersion of returns around the average, so it indicates total volatility. With equal average returns, the higher standard deviation of Fund B means greater volatility. The Sharpe ratio would actually be lower for B, since the return is the same but risk is higher. Beta is a different measure, relative to the market.

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