Performance Measurement and Evaluation of Portfolio Managers
15 questions. Each answer is explained.
Question 1 of 10Practice · Series XXI-A — Portfolio Management Services (PMS) Distributors
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Learn these topics
More units in NISM Series XXI-A
- Investments11
- Introduction to Securities Markets7
- Investing in Stocks15
- Investing in Fixed Income Securities8
- Derivatives7
- Collective Investment Vehicles8
- Role of Portfolio Managers15
- Operational Aspects of Portfolio Managers20
- Portfolio Management Process22
- Taxation7
- Regulatory, Governance and Ethical Aspects of Portfolio Managers15
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XXI-A Portfolio Management Services (PMS) Distributors
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 15 questions on Performance Measurement and Evaluation of Portfolio Managers, with answers
Q1A 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?
Option A. 7.5%
Why it is wrong: This ignores the separately paid investment income.
Option B. 10% — Correct answer
Option C. 9.09%
Why it is wrong: This uses the ₹88 lakh total ending wealth as the denominator rather than the starting investment.
Option D. 5%
Why it is wrong: This subtracts the investment-income payment from the capital gain instead of adding the separate receipt.
Answer: B. Holding-period total return includes the change in value and investment income received, without double counting distributions already inside ending value. Capital gain = ₹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, shown before you answer in practice mode: Common mistake: Omitting income paid outside the account or adding income that is already included.
XXI-A-114mediumnumerical
Q2A 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?
Option A. −1.00% — Correct answer
Option B. 35.00%
Why it is wrong: This compares ₹135 lakh with ₹100 lakh while ignoring the contribution.
Option C. 0.00%
Why it is wrong: This adds the subperiod percentages instead of linking their gross factors.
Option D. −3.57%
Why it is wrong: This divides the net value change by total contributed money rather than calculating a time-weighted return.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Averaging or adding returns when geometric linking is required.
XXI-A-115hardnumerical
Q3A 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?
Option A. A simple average of the portfolio’s monthly returns
Why it is wrong: That does not incorporate the size and timing of the client’s contributions and withdrawals.
Option B. The ending account value divided by the first contribution only
Why it is wrong: That ignores later contributions, withdrawals and their dates.
Option C. The change in the headline market index alone
Why it is wrong: An index return does not describe the client’s dated cash flows.
Option D. A dated money-weighted return such as XIRR — Correct answer
Answer: D. 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. XIRR 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, shown before you answer in practice mode: Common mistake: Using a manager-comparison measure as though it necessarily equals an individual client’s return.
XXI-A-116mediumapplication
Q4A portfolio with no external cash flows earns +20% in year 1 and −20% in year 2. Which statement is correct?
Option A. The cumulative return is −20% because the last year determines total performance.
Why it is wrong: The initial gain also affects the starting capital for the second year.
Option B. Both the arithmetic average and cumulative return are 0%.
Why it is wrong: The cumulative return is geometric rather than an arithmetic sum.
Option C. The arithmetic average is 0%, but the cumulative two-year return is −4%. — Correct answer
Option D. The arithmetic average is −4%, and cumulative return is 0%.
Why it is wrong: This interchanges the measures and misstates both calculations.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Assuming that an average of zero means capital was preserved.
XXI-A-117mediumconceptual
Q5Manager 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?
Option A. The same period and fee treatment, plus comparable mandates and risk context — Correct answer
Option B. Adding the fee percentage back to Manager A’s return without knowing its fee base
Why it is wrong: A mechanical adjustment can be wrong when the actual fees, timing or calculation method differ.
Option C. Only the larger of the two displayed percentages, whichever manager it belongs to
Why it is wrong: The larger figure may reflect a different period, cost basis or risk exposure.
Option D. Only confirmation that both managers’ reported percentages are positive
Why it is wrong: Positive signs do not make the measures comparable.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Ranking manager percentages without checking the period and fee basis.
XXI-A-118mediumapplication
Q6For 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?
Option A. A, with a Sharpe ratio of 0.80
Why it is wrong: This uses A’s total return instead of excess return and ignores B’s calculation.
Option B. They are equal because both exceed the risk-free rate
Why it is wrong: Positive excess returns do not imply equal risk-adjusted ratios.
Option C. A, because its raw return is higher
Why it is wrong: The Sharpe measure adjusts excess return for total volatility.
Option D. B, with a Sharpe ratio of 0.90 — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Failing to subtract the risk-free return or using different period conventions.
XXI-A-119hardconceptual
Q7A 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?
Option A. 10.67
Why it is wrong: This divides total return by beta without subtracting the risk-free return.
Option B. 18.00
Why it is wrong: This multiplies excess return by beta rather than dividing.
Option C. 0.08
Why it is wrong: This is the decimal-return expression, not the requested percentage-point expression.
Option D. 8.00 — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Confusing the decimal and percentage-point representations of the same measure.
XXI-A-120mediumnumerical
Q8Which statement correctly distinguishes the Sharpe and Treynor measures?
Option A. Both always use the same denominator and therefore give identical rankings.
Why it is wrong: Total volatility and beta are different measures, so rankings can differ.
Option B. Sharpe uses total standard deviation, while Treynor uses beta. — Correct answer
Option C. Treynor removes the need to examine unsystematic risk in a concentrated portfolio.
Why it is wrong: A beta-based measure does not show all idiosyncratic risk in a concentrated holding.
Option D. Sharpe uses only downside deviations, while Treynor uses total standard deviation.
Why it is wrong: The usual Sharpe measure uses total standard deviation, and Treynor uses beta.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Using a beta-based ratio as the complete risk assessment of a concentrated portfolio.
XXI-A-121mediumconceptual
Q9A concentrated portfolio has lower beta than a diversified portfolio but higher total standard deviation. Which explanation is consistent with these facts?
Option A. Higher total volatility proves that the portfolio contains no market risk.
Why it is wrong: Both market and company-specific risk can be present together.
Option B. Lower beta guarantees a smaller loss in every future period.
Why it is wrong: An average market-sensitivity measure is not a bound on every realised outcome.
Option C. The figures must be impossible because beta and standard deviation are identical.
Why it is wrong: Beta is not the same measure as total standard deviation.
Option D. Its market sensitivity may be lower while its company-specific fluctuations are larger. — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Using one market-sensitivity measure to summarise every possible portfolio loss.
XXI-A-122hardapplication
Q10An equity portfolio’s reported return includes reinvested dividends. Which benchmark choice best supports a fair comparison when the investment universe is otherwise matched?
Option A. A relevant total-return index that includes dividends — Correct answer
Option B. An unrelated asset index chosen after seeing the results
Why it is wrong: A benchmark should represent the relevant opportunity set rather than be chosen to flatter performance.
Option C. A price-only index selected because its return is lower
Why it is wrong: That omits a return component included in the portfolio and creates a biased comparison.
Option D. A fixed zero-return reference for every equity mandate
Why it is wrong: Zero does not generally represent the matched equity investment opportunity.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Choosing a benchmark after observing which one makes the manager look strongest.
XXI-A-123mediumapplication
Q11A 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?
Option A. 15.00%
Why it is wrong: This adds both component returns without weighting.
Option B. 6.00%
Why it is wrong: This includes only the equity contribution and omits debt.
Option C. 8.00% — Correct answer
Option D. 7.50%
Why it is wrong: This uses equal weights rather than the stated 60:40 weights.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Averaging component indices without using the policy weights.
XXI-A-124mediumnumerical
Q12An attribution report says overweighting a strong-performing sector helped relative return, while stock choices within that sector detracted. What distinction is being made?
Option A. Allocation helped, while security selection hurt. — Correct answer
Option B. The report proves future sector performance will be positive.
Why it is wrong: Attribution explains a past period under a specified model, not future outcomes.
Option C. Security selection helped, while allocation hurt.
Why it is wrong: This reverses the contribution descriptions supplied in the report.
Option D. Both effects must be positive whenever the sector benchmark rises.
Why it is wrong: Stocks selected within a rising sector can still underperform its benchmark.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Treating allocation and selection as the same decision.
XXI-A-125hardapplication
Q13An 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?
Option A. Stale prices may understate real swings in value and distort performance measures. — Correct answer
Option B. The standard deviation can be trusted without reviewing the prices it was calculated from.
Why it is wrong: A risk statistic inherits weaknesses in the data used to calculate it.
Option C. A smooth return series proves that the holding is risk-free and safe to keep.
Why it is wrong: Reported smoothness can result from infrequent or inappropriate valuation updates.
Option D. An old traded price must always remain the correct current value until a new trade.
Why it is wrong: Current valuation should consider applicable policies and relevant information.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Equating infrequent price changes with economic safety.
XXI-A-126hardapplication
Q14A 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?
Option A. Assume the departed manager’s entire skill transfers automatically to the replacement.
Why it is wrong: Continuity requires evidence about the process and the new decision-makers.
Option B. Examine investment continuity and operational controls before relying on the past record. — Correct answer
Option C. Ignore the change until a negative month occurs.
Why it is wrong: Waiting for a loss is not a substitute for evaluating a material organisational change.
Option D. Treat strong historical returns as proof that controls are unnecessary.
Why it is wrong: Performance does not establish that assets and transactions are properly controlled.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Using a historical ranking as the entire manager-selection process.
XXI-A-127mediumapplication
Q15A portfolio falls from ₹100 lakh to ₹80 lakh. With no cash flows, what subsequent return is required to regain ₹100 lakh?
Option A. 20%
Why it is wrong: This uses the original ₹100 lakh base rather than the capital remaining after the loss.
Option B. 25% — Correct answer
Option C. 16%
Why it is wrong: This multiplies the loss rate by the remaining fraction rather than calculating a recovery rate.
Option D. 80%
Why it is wrong: This is the remaining-value percentage, not the required gain.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Assuming that an equal percentage gain reverses a loss.
XXI-A-128mediumnumerical
Performance Measurement and Evaluation of Portfolio Managers: common questions
How many practice questions are there on Performance Measurement and Evaluation of Portfolio Managers?
15 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 12 practice topics for NISM Series XXI-A, which has 150 questions in total.
Are these real NISM Series XXI-A questions on Performance Measurement and Evaluation of Portfolio Managers?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series XXI-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Taxation
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