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

While comparing two large-cap equity schemes, a distributor finds Scheme A has a Sharpe ratio of 0.9 and Scheme B has 0.6 over the same period and same benchmark. What is the correct interpretation?

Scheme A delivered more excess return over the risk-free rate for each unit of total risk taken, since Sharpe ratio equals excess return divided by standard deviation. It says nothing definite about absolute returns, volatility alone or expense ratios.

  1. AScheme A gave higher excess return per unit of total riskCorrect
  2. BScheme A has lower standard deviation in every case
  3. CScheme B gave higher absolute returns in every case
  4. DScheme B has a lower expense ratio

Explanation

Sharpe ratio is excess return over the risk-free rate divided by standard deviation. A higher value means better risk-adjusted return per unit of total risk. It does not reveal which scheme has lower standard deviation, higher absolute return or lower expenses.

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