NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds
An equity fund returned 12% in a year. Its benchmark returned 10%, and the fund's beta against the benchmark is 1.0 over the same period. Which statement is most appropriate about the fund's performance?
The fund delivered a positive excess return of 2 percentage points, since 12% minus 10% equals 2%. A beta of 1.0 only indicates that the fund moves in line with the benchmark. It does not mean zero risk or zero tracking error.
- AThe fund generated a positive excess return of 2 percentage points over the benchmarkCorrect
- BThe fund underperformed because its return is not a multiple of the benchmark return
- CThe fund's tracking error must be zero because beta is 1.0
- DThe fund carries no risk because beta is 1.0
Explanation
Excess return is fund return minus benchmark return, which is 12% - 10% = 2 percentage points. Beta of 1.0 shows market-like sensitivity, not zero tracking error or zero risk. Tracking error depends on the variability of the return difference, which beta does not reveal.
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