We introduce density-functional theory for inhomogeneous Bose-Fermi mixtures, derive the associated Kohn-Sham equations, and determine the exchange-correlation energy in local-density approximation. We solve numerically the Kohn-Sham system, and determine the boson and fermion density distributions and the ground-state energy of a trapped, dilute mixture beyond mean-field approximation. The importance of the corrections due to exchange correlation is discussed by a comparison with current experiments; in particular, we investigate the effect of the repulsive potential-energy contribution due to exchange correlation on the stability of the mixture against collapse.