Unit ko samjho · NISM Series XXI-A
Performance Measurement and Evaluation of Portfolio Managers
15 questions is unit mein
Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.
Is unit mein kya hai
- A portfolio starts at ₹80 lakh, ends at ₹86 lakh and pays ₹2 lakh of investment income to the client at the end of the period. The ending value excludes that payment. With no contributions or other withdrawals, what is the holding-period return?
- A portfolio grows from ₹100 lakh to ₹110 lakh. The client then adds ₹40 lakh, making ₹150 lakh. It ends the next subperiod at ₹135 lakh. What is the two-subperiod time-weighted return?
- A client wants the annualised return on their own experience with contributions and withdrawals on irregular dates. Which approach most directly uses the dates and sizes of those external cash flows?
- A portfolio with no external cash flows earns +20% in year 1 and −20% in year 2. Which statement is correct?
- Manager A reports a three-year annualised return net of all stated fees. Manager B reports a one-year return before fees. What is needed for a meaningful direct comparison?
- For the same annual period, portfolio A returns 16% with standard deviation 20%, and B returns 13% with standard deviation 10%. The risk-free rate is 4%. Which has the higher Sharpe ratio?
- A portfolio returns 16%, the risk-free return is 4% and portfolio beta is 1.5. What is the Treynor measure, expressed in percentage points of excess return per unit of beta?
- Which statement correctly distinguishes the Sharpe and Treynor measures?
- A concentrated portfolio has lower beta than a diversified portfolio but higher total standard deviation. Which explanation is consistent with these facts?
- An equity portfolio’s reported return includes reinvested dividends. Which benchmark choice best supports a fair comparison when the investment universe is otherwise matched?
- A one-period custom benchmark uses starting weights of 60% equity and 40% debt. The equity benchmark returns 10% and the debt benchmark returns 5%. With no intra-period rebalance, what is the blended return?
- An attribution report says overweighting a strong-performing sector helped relative return, while stock choices within that sector detracted. What distinction is being made?
- An illiquid holding is repeatedly valued at an old transaction price despite new adverse information. Its reported return series appears unusually smooth. What concern should an evaluator raise?
- A PMS approach has attractive past returns, but its key decision-maker has left and its reconciliation controls are undocumented. What is the appropriate due-diligence response?
- A portfolio falls from ₹100 lakh to ₹80 lakh. With no cash flows, what subsequent return is required to regain ₹100 lakh?
Zaroori ideas
Practice bank se · 1
A portfolio starts at ₹80 lakh, ends at ₹86 lakh and pays ₹2 lakh of investment income to the client at the end of the period. The ending value excludes that payment. With no contributions or other withdrawals, what is the holding-period return?
Holding-period total return includes the change in value and investment income received, without double counting distributions already inside ending value. = ₹86 lakh − ₹80 lakh = ₹6 lakh. Add the separately paid ₹2 lakh income to obtain ₹8 lakh. Return = ₹8 lakh/₹80 lakh = 10%. The cash payment is identified as investment income rather than a return of contributed principal. Remember: Include investment income once, and use the correct opening-value base.
Hint Common mistake: Omitting income paid outside the account or adding income that is already included.
XXI-A-114Practice bank se · 2
A portfolio grows from ₹100 lakh to ₹110 lakh. The client then adds ₹40 lakh, making ₹150 lakh. It ends the next subperiod at ₹135 lakh. What is the two-subperiod time-weighted return?
Time-weighted return removes the direct effect of external cash-flow size by measuring and geometrically linking returns between those flows. First return = 110/100 − 1 = 10%. After the contribution, the second period starts at 150, so its return is 135/150 − 1 = −10%. Linked return = (1.10 × 0.90) − 1 = −1%. The ₹40 lakh contribution is not a manager-earned gain. Remember: Split at external cash flows and multiply subperiod growth factors.
Hint Common mistake: Averaging or adding returns when geometric linking is required.
XXI-A-115Practice bank se · 3
A client wants the annualised return on their own experience with contributions and withdrawals on irregular dates. Which approach most directly uses the dates and sizes of those external cash flows?
A money-weighted return reflects the investor’s cash-flow experience, whereas a time-weighted measure answers a different performance question. Record contributions as investor outflows and withdrawals or final liquidation value as investor inflows, with their actual dates. seeks an annualised rate that equates the present values. Some unusual cash-flow patterns can produce no unique economically meaningful solution, so results still need review. Remember: Choose the return measure that matches whose performance experience is being assessed.
Hint Common mistake: Using a manager-comparison measure as though it necessarily equals an individual client’s return.
XXI-A-116Practice bank se · 4
A portfolio with no external cash flows earns +20% in year 1 and −20% in year 2. Which statement is correct?
An arithmetic average describes an average period rate. A cumulative return describes the change in wealth after compounding. Arithmetic average = (20% − 20%)/2 = 0%. For ₹100 initially, ending wealth is ₹100 × 1.20 × 0.80 = ₹96, a cumulative loss of 4%. Remember: Equal positive and negative percentage returns do not cancel in compounded wealth.
Hint Common mistake: Assuming that an average of zero means capital was preserved.
XXI-A-117Practice bank se · 5
Manager A reports a three-year annualised return net of all stated fees. Manager B reports a one-year return before fees. What is needed for a meaningful direct comparison?
Performance comparisons require consistent measurement definitions before any conclusion is drawn. Align the observation period and annualisation method, then determine which costs and distributions are included. Also review the investment mandate and relevant risk exposures. A common numerical format does not ensure a like-for-like economic comparison. Remember: Compare definitions and context before comparing return numbers.
Hint Common mistake: Ranking manager percentages without checking the period and fee basis.
XXI-A-118Practice bank se · 6
For the same annual period, portfolio A returns 16% with standard deviation 20%, and B returns 13% with standard deviation 10%. The risk-free rate is 4%. Which has the higher Sharpe ratio?
The Sharpe ratio divides return above the risk-free reference by total return standard deviation on a consistent measurement basis. A: (16% − 4%)/20% = 0.60. B: (13% − 4%)/10% = 0.90. B has the higher ratio in the supplied data, which is not a prediction or a complete suitability conclusion. Remember: A higher raw return need not mean a higher excess return per unit of total risk.
Hint Common mistake: Failing to subtract the risk-free return or using different period conventions.
XXI-A-119Practice bank se · 7
A portfolio returns 16%, the risk-free return is 4% and portfolio beta is 1.5. What is the Treynor measure, expressed in percentage points of excess return per unit of beta?
The Treynor measure relates excess return to systematic risk measured by beta. Excess return = 16% − 4% = 12 percentage points. Treynor = 12/1.5 = 8 percentage points per unit of beta. The equivalent decimal-return representation is 0.08, but the requested unit is percentage points. Remember: Use beta for Treynor and keep the reporting units explicit.
Hint Common mistake: Confusing the decimal and percentage-point representations of the same measure.
XXI-A-120Practice bank se · 8
Which statement correctly distinguishes the Sharpe and Treynor measures?
Risk-adjusted measures answer different questions depending on their risk denominator. Sharpe assesses excess return relative to total variation in portfolio returns. Treynor uses market-related risk through beta, which is especially important to interpret alongside the portfolio’s diversification and the investor’s wider holdings. Remember: Choose and interpret the denominator rather than treating all risk-adjusted ratios as interchangeable.
Hint Common mistake: Using a beta-based ratio as the complete risk assessment of a concentrated portfolio.
XXI-A-121Practice bank se · 9
A concentrated portfolio has lower beta than a diversified portfolio but higher total standard deviation. Which explanation is consistent with these facts?
A portfolio may have relatively modest systematic exposure but substantial idiosyncratic risk. Interpret beta as sensitivity to the specified market reference rather than as total risk. Concentration can create large security-specific variation that raises standard deviation without a corresponding increase in beta. Remember: Lower beta does not automatically mean lower total risk.
Hint Common mistake: Using one market-sensitivity measure to summarise every possible portfolio loss.
XXI-A-122Practice bank se · 10
An equity portfolio’s reported return includes reinvested dividends. Which benchmark choice best supports a fair comparison when the investment universe is otherwise matched?
A useful benchmark reflects the relevant opportunity set and uses a return definition consistent with the portfolio being evaluated. Match the portfolio’s asset universe and return components to the benchmark. Because the portfolio includes reinvested dividends, a relevant total-return reference is more comparable than a price-only measure. Benchmark suitability is not established by a convenient low return. Remember: Match both investment scope and income treatment when benchmarking.
Hint Common mistake: Choosing a benchmark after observing which one makes the manager look strongest.
XXI-A-123Practice bank se · 11
A one-period custom benchmark uses starting weights of 60% equity and 40% debt. The equity benchmark returns 10% and the debt benchmark returns 5%. With no intra-period rebalance, what is the blended return?
A custom benchmark combines relevant component benchmarks using a stated weighting and rebalancing convention. Equity contributes 6 percentage points and debt contributes 2 percentage points. Add them to obtain 8%. For multiple periods, the benchmark’s rebalancing and linking rules would also matter. Remember: Document the weighting convention when constructing a blended benchmark.
Hint Common mistake: Averaging component indices without using the policy weights.
XXI-A-124Practice bank se · 12
An attribution report says overweighting a strong-performing sector helped relative return, while stock choices within that sector detracted. What distinction is being made?
Performance attribution separates sources of relative return, such as asset or sector weights and within-group security choices. Overweighting a sector concerns the allocation decision. Selecting securities within it concerns selection. A favourable allocation effect can coexist with an unfavourable selection effect. The full report may also contain interaction and other model-specific components. Remember: A correct broad exposure can be partly offset by weaker security choices.
Hint Common mistake: Treating allocation and selection as the same decision.
XXI-A-125Practice bank se · 13
An illiquid holding is repeatedly valued at an old transaction price despite new adverse information. Its reported return series appears unusually smooth. What concern should an evaluator raise?
Performance and risk statistics depend on the reliability and timeliness of valuations. Examine how current information enters the valuation and whether the policy is being consistently applied. Stale prices can postpone recognition of losses and smooth measured returns. Review both valuations and the resulting statistics rather than concluding that risk is low. Remember: Validate the price series before trusting the precision of its risk statistics.
Hint Common mistake: Equating infrequent price changes with economic safety.
XXI-A-126Practice bank se · 14
A PMS approach has attractive past returns, but its key decision-maker has left and its reconciliation controls are undocumented. What is the appropriate due-diligence response?
Manager selection considers the repeatability of the investment process and the robustness of the organisation, not just a return series. Assess which people and decisions generated the historical record and how the process will continue. Review custody, reconciliation, reporting and other controls. Strong returns cannot resolve undocumented operational responsibilities. Remember: Evaluate people, process and controls alongside performance.
Hint Common mistake: Using a historical ranking as the entire manager-selection process.
XXI-A-127Practice bank se · 15
A portfolio falls from ₹100 lakh to ₹80 lakh. With no cash flows, what subsequent return is required to regain ₹100 lakh?
A percentage loss and the gain needed to reverse it use different capital bases. Required increase = ₹100 lakh − ₹80 lakh = ₹20 lakh. Recovery return = ₹20 lakh/₹80 lakh × 100 = 25%. A 20% gain on ₹80 lakh would reach only ₹96 lakh. Remember: Calculate a recovery return from the capital remaining after the drawdown.
Hint Common mistake: Assuming that an equal percentage gain reverses a loss.
XXI-A-128A capital gain is the gain from selling an asset for more than its eligible cost.
Aage padhoXIRR is an annualised rate of return.
Aage padho