NISM Series XXI-A · Unit 10 of 12 · about 10% of the paper
Performance measurement and evaluation of portfolio managers: NISM Series XXI-A notes and practice questions
How to judge a PMS: returns, benchmarks, risk-adjusted measures and standard reporting.
What to know in Unit 10
- TWRR and annualised return.
- Benchmark and alpha.
- Sharpe, drawdown, capture ratios.
Key terms, examples and exam traps
Time-weighted return
TWRR removes the effect of cash inflows and outflows, so it measures the manager's skill independent of the client's timing.
Example. A manager's return is computed between each deposit or withdrawal and then chained.
Exam trap. This statement is false: TWRR is affected by when the client adds money.
Money-weighted return
The money-weighted return (IRR) reflects the size and timing of cash flows and captures the client's actual experience.
Example. A client's own return depends on when she invested.
Exam trap. This statement is false: Money-weighted return ignores cash flow timing.
Annualised return
Annualised return converts a return over any period into an equivalent yearly rate for comparison.
Example. A 21% return over two years is about 10% a year.
Exam trap. This statement is false: Annualised return is the simple sum of all returns.
Benchmark
A benchmark is a standard index against which performance is compared, chosen to match the strategy.
Example. A large-cap portfolio is compared to a large-cap index.
Exam trap. This statement is false: Any index can serve as the benchmark.
Alpha
Alpha is the excess return of a portfolio over its benchmark or over what its risk would predict.
Example. A portfolio earns 3% more than the benchmark.
Exam trap. This statement is false: Alpha is the portfolio's total return.
Standard deviation
Standard deviation measures the volatility of returns; higher values indicate more risk.
Example. A portfolio's returns vary widely from month to month.
Exam trap. This statement is false: Standard deviation measures the average return.
Sharpe ratio
The Sharpe ratio measures excess return per unit of total risk; a higher ratio means better risk-adjusted performance.
Example. Two managers with equal returns are compared on risk taken.
Exam trap. This statement is false: The Sharpe ratio considers only returns.
Maximum drawdown
Maximum drawdown is the largest peak-to-trough decline in portfolio value, showing worst-case loss experienced.
Example. A portfolio fell 30% from its highest value.
Exam trap. This statement is false: Maximum drawdown measures the biggest gain.
Up and down capture
Capture ratios show how much of the benchmark's up and down moves a portfolio captures; high up-capture and low down-capture is desirable.
Example. A portfolio captures 110% of rising markets and 80% of falling markets.
Exam trap. This statement is false: A high down-capture ratio is desirable.
Consistency
Consistency, shown by rolling returns over many periods, matters more than a single period's return.
Example. A manager's three-year rolling returns beat the benchmark in most windows.
Exam trap. This statement is false: One strong year proves skill.
Standardised reporting
SEBI requires performance of portfolio managers to be reported in a uniform manner, using TWRR, through an independent central performance platform.
Example. Managers' returns can be compared on a common basis.
Exam trap. This statement is false: Each manager may choose its own method.
Gross versus net returns
Gross returns are before fees and expenses while net returns are after them; investors should compare net returns.
Example. An investor looks at returns after costs.
Exam trap. This statement is false: Gross returns are what the client receives.
Style drift
Style drift occurs when a manager moves away from the stated investment approach, which should be monitored.
Example. A large-cap approach quietly buys small caps.
Exam trap. This statement is false: Style drift is the sign of consistent discipline.
Risk-adjusted evaluation
Evaluating a manager involves return, risk, consistency, process and costs, not just headline returns.
Example. An adviser examines several measures before recommending a manager.
Exam trap. This statement is false: Only the last year's return matters.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? Gross returns are before fees and expenses while net returns are after them; investors should compare net returns.
- Registration of portfolio managers
- Gross versus net returns
- Investment policy
- Primary market
Q2. Which statement best describes “Consistency”?
- Consistency, shown by rolling returns over many periods, matters more than a single period's return.
- Clients have the option to be onboarded directly with the portfolio manager without a distributor, and the manager must offer a direct plan.
- The investment horizon is the period for which funds can remain invested, affecting what assets are suitable.
- Good governance, with independent boards and transparent disclosure, reduces the risk of value loss to minority shareholders.
Q3. Which statement best describes “Risk-adjusted evaluation”?
- High portfolio turnover can push more gains into short-term, increasing the tax cost.
- Evaluating a manager involves return, risk, consistency, process and costs, not just headline returns.
- P/B compares share price with book value per share, widely used for banks and asset-heavy companies.
- A client's risk profile combines willingness and ability to bear loss and guides the portfolio mix.
Q4. Which statement best describes “Sharpe ratio”?
- Exit load is a charge on withdrawal in the early years: at most 3% in the first year, 2% in the second and 1% in the third, with none thereafter.
- An ETF is a fund traded on exchanges, typically tracking an index at low cost.
- The Sharpe ratio measures excess return per unit of total risk; a higher ratio means better risk-adjusted performance.
- Portfolio managers must provide an investor charter explaining the rights and obligations of clients and the grievance process.
Q5. Which statement best describes “Maximum drawdown”?
- Maximum drawdown is the largest peak-to-trough decline in portfolio value, showing worst-case loss experienced.
- The bottom-up approach starts with analysing individual companies, regardless of macro or sector views.
- Management fees and expenses may be deductible against gains or income as per the law, subject to conditions.
- A custodian safekeeps the securities of PMS clients independent of the manager, and settles trades.
Q6. Which statement best describes “Time-weighted return”?
- Portfolio managers must be registered with SEBI and meet net-worth requirements; the minimum net worth is ₹5 crore.
- TWRR removes the effect of cash inflows and outflows, so it measures the manager's skill independent of the client's timing.
- A custodian safekeeps the securities of PMS clients independent of the manager, and settles trades.
- A futures contract is an exchange-traded agreement to buy or sell an asset at a fixed price on a future date.
Frequently asked questions
How much of NISM Series XXI-A comes from Unit 10?
Unit 10 (Performance measurement and evaluation of portfolio managers) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XXI-A Unit 10?
TWRR and annualised return. Benchmark and alpha. Sharpe, drawdown, capture ratios.
Are these NISM Series XXI-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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