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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

A portfolio manager's portfolio returned 15% in a year while its benchmark returned 11%. The portfolio's beta is 1.0 and the standard deviation of both is similar. What does the 4 percentage point difference represent?

The 4 percentage point gap is the excess or active return over the benchmark. It is calculated by subtracting the benchmark return from the portfolio return, and shows how much the manager outperformed the chosen benchmark.

  1. AExcess return over the benchmark (active return)Correct
  2. BSharpe ratio
  3. CSystematic risk
  4. DRisk-free rate

Explanation

Portfolio return minus benchmark return is 15% - 11% = 4%, which is the active or excess return over the benchmark. The Sharpe ratio uses excess return over the risk-free rate divided by standard deviation, so it is not a simple difference. Systematic risk is measured by beta, and the risk-free rate is not given.

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