Ch.11 · Scheme Performance Disclosure Rules · hard
An investor wants to compare two equity funds that invest in different market segments. Which metric is most appropriate for this cross-category comparison?
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EXPLANATION
When comparing funds with different risk profiles, risk-adjusted metrics like Sharpe Ratio are most appropriate. Comparing absolute returns of a small-cap fund (higher risk) with a large-cap fund (lower risk) is misleading — Sharpe Ratio normalises for the risk taken to earn those returns.
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