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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

While comparing two diversified equity funds, a distributor notes that Fund A has a beta of 0.8 and Fund B has a beta of 1.2 against the same benchmark. What is the correct interpretation?

Fund A, with beta 0.8, is expected to swing less than the benchmark, while Fund B, with beta 1.2, is expected to swing more. Beta measures sensitivity to market movements only; it does not indicate past returns, expense ratio or alpha.

  1. AFund A is expected to be less volatile than the benchmark, and Fund B more volatileCorrect
  2. BFund A has given lower absolute returns than Fund B in the past
  3. CFund B has a lower expense ratio than Fund A
  4. DFund A has higher alpha than Fund B

Explanation

Beta measures sensitivity to benchmark movements. A beta below 1 means the fund tends to move less than the benchmark, and above 1 means it tends to move more. Beta says nothing about past returns, costs or alpha.

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