NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance
A scheme returned 14% over a year while its benchmark returned 11% over the same period. Which statement about this scheme is correct?
The scheme has outperformed its benchmark by 3 percentage points, which is its excess return or alpha on a simple basis. Tracking error is a volatility measure of return differences, while beta and expense ratio cannot be inferred from two period returns.
- AIt has generated a positive alpha of 3 percentage points over the benchmark on a simple return-difference basisCorrect
- BIt has a tracking error of 3%
- CIts beta is 1.27
- DIts expense ratio is 3% lower than the benchmark
Explanation
Outperformance of the benchmark by 14% - 11% = 3 percentage points is the simple excess return (alpha). Tracking error measures the standard deviation of return differences, not a single-period gap. Beta and expense ratio cannot be derived from these two returns alone.
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