NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance
Which statement about the Sharpe ratio of a mutual fund scheme is correct?
The Sharpe ratio is the scheme's return above the risk-free rate divided by the standard deviation of its returns. It shows the reward earned per unit of total risk. A higher value signals better risk-adjusted performance.
- AIt measures excess return over the risk-free rate per unit of beta
- BIt measures excess return over the risk-free rate per unit of standard deviationCorrect
- CIt measures the scheme's return minus the benchmark return
- DIt measures the fall in NAV from a peak to a trough
Explanation
Sharpe ratio = (scheme return - risk-free return) / standard deviation of scheme returns, so it captures total risk. Excess return per unit of beta is the Treynor ratio. Return minus benchmark return is the active return, and the peak-to-trough fall is the drawdown.
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