Skip to content

NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

Risks and Returns in Equity Investing for NISM XXI-A

Updated 11 October 2026 · Fact-checked

Equity return is the gain from price change plus dividends. Risk is the uncertainty of that return, measured by standard deviation. Systematic risk affects the whole market and is measured by beta. Unsystematic risk is specific to a company and can be reduced by diversification. Use the formulas stepwise to solve questions.

Understand Risks and Returns in Equity Investing

Return is what you earn on a stock. It has two parts: the change in price and any dividend you receive. Return is usually shown as a percentage of the amount invested.

Risk is the chance that actual return differs from what you expected. A stock whose return swings widely from year to year is riskier than one that moves in a narrow range. The usual measure of this spread is standard deviation. A higher standard deviation means higher total risk.

Risk has two sources. Systematic risk (market risk) comes from factors that hit the whole market, such as interest rate changes, inflation, recessions or policy shocks. You cannot remove it by owning more stocks. Unsystematic risk (specific risk) comes from one company or sector, such as a management failure, a product recall or a regulatory penalty. You can reduce it by holding many stocks that do not move together.

Beta measures how sensitive a stock is to market moves. The market has a beta of 1. A beta above 1 means the stock tends to move more than the market. A beta below 1 means it tends to move less. Beta captures only systematic risk.

Diversification spreads money across different stocks and sectors. As you add stocks, unsystematic risk falls, but systematic risk stays. That is why a PMS portfolio can still fall when the whole market falls. Higher expected return is the reward investors expect for taking higher systematic risk.

Key formulas to remember

Holding period return
Return % = [(Ending price − Beginning price + Dividend) ÷ Beginning price] × 100
Include dividends received during the period. Price change alone understates the total return.
Expected return
E(R) = Σ (Probability × Return)
Multiply each scenario's return by its probability and add. Probabilities must total 1.
Variance and standard deviation
Variance = Σ (R − mean)² ÷ n for a full set of returns; Standard deviation = √Variance
For a sample, divide by (n − 1). Read the question to see which one applies. For scenario data use Σ P × (R − E(R))².
Total risk
Total risk = Systematic risk + Unsystematic risk
Diversification removes only the unsystematic part.
Beta
Beta = Covariance (stock, market) ÷ Variance (market)
Market beta = 1. Beta above 1 is aggressive. Beta below 1 is defensive.
Expected stock move using beta
Expected stock change ≈ Beta × Market change
A simple approximation that holds only for the systematic part of the move.
Portfolio beta
Portfolio beta = Σ (Weight × Beta of each stock)
Weights are shares of portfolio value and add to 1.

How to solve Risks and Returns in Equity Investing questions

Use this order for any question on risk and return in equities.

  1. 1Identify what is asked: return, expected return, risk measure, beta effect, or a concept like diversification.
  2. 2Check the keywords. Market-wide, cannot be diversified, beta points to systematic risk. Company-specific, diversifiable points to unsystematic risk.
  3. 3For return, add price change and dividend, then divide by the beginning price.
  4. 4For expected return, multiply each return by its probability and add them all.
  5. 5For standard deviation, find the mean, take each deviation, square it, average it, then take the square root.
  6. 6For beta questions, multiply beta by the market move, or take weighted beta for a portfolio.
  7. 7Check that your answer is in the right units (percentage or rupees) and that probabilities or weights add up correctly.
  8. 8Eliminate options that say diversification removes all risk or that beta measures total risk.

Quickest way: Keyword and estimate method

When to use it: Use it for concept questions and for numbers where options are far apart.

  1. Match the keyword: market-wide means systematic and beta; company-specific means unsystematic and diversifiable.
  2. Remember that standard deviation is total risk and beta is market risk only.
  3. For beta, quickly compute beta × market move and pick the closest option.
  4. For portfolio beta, multiply each weight by its beta and add.
  5. Reject any option with the word always or eliminates all risk.

Common mistakes in Risks and Returns in Equity Investing

  • Saying diversification removes all risk.

    Students remember that diversification reduces risk and stretch it too far.

    Fix: Diversification removes only unsystematic risk. Systematic risk remains.

  • Treating beta as a measure of total risk.

    Beta and standard deviation are both called risk measures.

    Fix: Beta measures only sensitivity to the market. Standard deviation measures total risk.

  • Leaving out dividends when computing return.

    Students focus on the price change.

    Fix: Add dividends received to the price change before dividing by the beginning price.

  • Forgetting the square root in standard deviation.

    Variance is computed last and looks like a finished answer.

    Fix: Standard deviation is √variance. Always take the root as the final step.

  • Assuming a beta below 1 means the stock loses value.

    Low is confused with negative.

    Fix: Beta below 1 means the stock moves less than the market in the same direction. Only a negative beta moves opposite.

  • Using wrong weights in portfolio beta.

    Students use rupee amounts or average the betas.

    Fix: Convert amounts into proportions of total value, then multiply by each beta and add.

Worked examples

Example 1

You buy a share at ₹200. A year later it trades at ₹230 and you received a dividend of ₹10 during the year. What is your holding period return?

Show the solution
  1. Price change = 230 − 200 = ₹30.
  2. Add dividend: 30 + 10 = ₹40.
  3. Divide by beginning price: 40 ÷ 200 = 0.20.
  4. Convert to percentage: 0.20 × 100 = 20%.

Answer: 20%

Example 2

A portfolio has ₹6,00,000 in stock A with beta 1.5 and ₹4,00,000 in stock B with beta 0.5. If the market rises by 10%, what is the approximate expected rise in the portfolio?

Show the solution
  1. Total value = 6,00,000 + 4,00,000 = ₹10,00,000.
  2. Weight of A = 0.6 and weight of B = 0.4.
  3. Portfolio beta = (0.6 × 1.5) + (0.4 × 0.5) = 0.90 + 0.20 = 1.10.
  4. Expected move = 1.10 × 10% = 11%.

Answer: About 11%

Exam tips

  • Expect many direct definition questions. Learn the pairing: systematic with market risk, beta and non-diversifiable; unsystematic with specific risk and diversifiable.
  • Watch for absolute words such as always, eliminates or only. They are often the trap option.
  • Numerical questions are short. Practise holding period return, portfolio beta and expected return.
  • Negative marking in this exam is 10% of the marks for a question. Eliminate options before guessing.
  • Know that higher beta means higher volatility relative to the market, not higher quality or guaranteed return.

Practice questions from Investing in Stocks (NISM XXI-A)

Risks and Returns in Equity Investing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Risks and Returns in Equity Investing: frequently asked questions

What is the difference between systematic and unsystematic risk?

Systematic risk affects the whole market, such as interest rate changes or inflation, and cannot be removed by diversification. Unsystematic risk is specific to a company or sector and can be reduced by holding many different stocks.

What is beta in the stock market with an example?

Beta shows how much a stock tends to move compared with the market. If a stock has a beta of 1.2 and the market rises 10%, the stock is expected to rise about 12%. If the market falls 10%, it is expected to fall about 12%.

How do you calculate standard deviation of stock returns?

Find the average return, subtract it from each return, square each difference, and average the squares to get variance. Then take the square root. For sample data, divide by n − 1 instead of n.

Does a high standard deviation mean a bad stock?

No. It means returns are more spread out, so the stock is more volatile. Whether it suits an investor depends on the investor's risk tolerance and objectives.