As a portfolio manager, you are tasked with evaluating the performance of your mutual fund over the past year. The fund has consistently outperformed its benchmark index, but you are analyzing its performance to understand the reasons behind this success. You gather the following information: Fund return for the year: 12% Benchmark return for the year: 8% Standard deviation of the fund: 10% Standard deviation of the benchmark: 6% You need to assess the fund's performance using the Sharpe Ratio, which measures risk-adjusted return. Based on the above data, which of the following statements regarding the performance of the mutual fund is accurate?

Exam

CFA Level 2

Section

Difficulty

Portfolio Management

Evaluating Mutual Fund Performance Using Sharpe Ratio

Medium Performance Evaluation Performance Appraisal

As a portfolio manager, you are tasked with evaluating the performance of your mutual fund over the past year. The fund has consistently outperformed its benchmark index, but you are analyzing its performance to understand the reasons behind this success. You gather the following information:

Fund return for the year: 12%
Benchmark return for the year: 8%
Standard deviation of the fund: 10%
Standard deviation of the benchmark: 6%

You need to assess the fund's performance using the Sharpe Ratio, which measures risk-adjusted return. Based on the above data, which of the following statements regarding the performance of the mutual fund is accurate?

The Sharpe Ratio indicates the fund has superior risk-adjusted performance compared to the benchmark.

The fund has underperformed the benchmark on a risk-adjusted basis.

The Sharpe Ratio cannot be calculated without knowing the risk-free rate.

Hint

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