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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 strategy earned 15% in a year, while its benchmark returned 11%. The risk-free rate was 6%. What is the excess return of the strategy over the benchmark?

The excess return over the benchmark is 4 percentage points, found by subtracting the benchmark return of 11% from the strategy return of 15%. The risk-free rate is irrelevant to benchmark-relative comparison and is used only for risk-adjusted measures such as Sharpe.

  1. A4%Correct
  2. B9%
  3. C5%
  4. D2%

Explanation

Excess return over the benchmark = 15% - 11% = 4%. The 9% option subtracts the risk-free rate from the portfolio return (15 - 6), which measures return over the risk-free rate, not over the benchmark. The 5% option subtracts the risk-free rate from the benchmark return (11 - 6).

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