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

While comparing two equity schemes in the same category, a distributor finds Scheme X has a 5-year return of 14% with a standard deviation of 18%, and Scheme Y has a 5-year return of 14% with a standard deviation of 13%. For a risk-averse client, what is the most reasonable inference?

Scheme Y is better for a risk-averse client, because it delivered the same 14% return with a lower standard deviation of 13% versus 18%. Standard deviation captures total volatility, so lower means more stable, better risk-adjusted performance.

  1. AScheme X is better because higher volatility means higher future returns
  2. BScheme Y is better because it gave the same return with lower volatilityCorrect
  3. CBoth are equal because returns are identical
  4. DScheme X is better because standard deviation measures only upside risk

Explanation

Standard deviation measures total variability of returns around the mean, both up and down. Equal returns with lower standard deviation means better risk-adjusted performance for Y. Higher volatility does not guarantee higher future returns.

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