Assessing Mutual Fund Performance with Sharpe Ratio

Medium Performance Evaluation Performance Appraisal

As a portfolio manager assessing the performance of a mutual fund, you are particularly concerned with both the absolute and relative performance of the portfolio. You decide to use the Sharpe ratio as one of the key metrics for performance evaluation. The mutual fund has a return of 10%, a risk-free rate of 3%, and a standard deviation of 5%.

Based on this information, which of the following statements about the fund's performance appraisal using the Sharpe ratio is correct?

The Sharpe ratio indicates that the portfolio has outperformed the risk-free rate on a risk-adjusted basis.

The Sharpe ratio measures the excess return over the risk-free rate, but does not account for the volatility of the portfolio.

A higher Sharpe ratio suggests that the portfolio carries more risk than the risk-free asset.

Hint

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