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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds

A scheme returned 18% in a year while its benchmark index returned 15%. Its beta relative to the benchmark is 1.2. What does a beta of 1.2 indicate?

A beta of 1.2 means the scheme is expected to move about 1.2% for every 1% movement in the benchmark. It is therefore more volatile than the market. Beta measures sensitivity to the benchmark, not outperformance or total standard deviation.

  1. AThe scheme is expected to move about 1.2% for every 1% move in the benchmarkCorrect
  2. BThe scheme beat the benchmark by 1.2%
  3. CThe scheme has a standard deviation of 1.2%
  4. DThe scheme's risk-free return is 1.2%

Explanation

Beta shows sensitivity to the benchmark: 1.2 means the scheme is expected to move about 20% more than the benchmark, so roughly 1.2% for each 1% move. Outperformance is a separate matter, here 3%, and beta is not a volatility figure or a risk-free rate.

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