NISM Series XXI-B · Unit 11 of 12 · about 8% of the paper
Performance measurement, attribution and valuation: NISM Series XXI-B notes and practice questions
Return calculation, risk-adjusted measures, attribution, benchmarking, GIPS and valuing securities.
What to know in Unit 11
- TWRR and MWRR.
- Sharpe, Treynor, alpha.
- Attribution.
- Valuation.
Key terms, examples and exam traps
Time-weighted return
TWRR removes the effect of the timing and size of client cash flows, so it measures the manager's skill.
Example. A manager is measured regardless of client deposits.
Exam trap. This statement is false: TWRR depends on when the client adds money.
Money-weighted return
The money-weighted return is the internal rate of return and is affected by the timing of cash flows.
Example. A client's return is lower after a late deposit before a fall.
Exam trap. This statement is false: MWRR is independent of cash flow timing.
Sharpe ratio
The Sharpe ratio is excess return over the risk-free rate divided by standard deviation, showing return per unit of total risk.
Example. A fund returns 12% with 7% risk-free and 10% deviation, giving 0.5.
Exam trap. This statement is false: The Sharpe ratio uses beta as risk.
Treynor ratio
The Treynor ratio is excess return over the risk-free rate divided by beta, showing return per unit of systematic risk.
Example. A fund earns 5% excess with beta 1.25, giving 4%.
Exam trap. This statement is false: The Treynor ratio uses total risk.
Jensen's alpha
Jensen's alpha is the portfolio return less the CAPM expected return, and a positive value means outperformance for the beta taken.
Example. A fund earns 3% above its CAPM return.
Exam trap. This statement is false: A negative alpha shows outperformance.
Information ratio
The information ratio is active return divided by tracking error, showing return per unit of active risk.
Example. A manager earns 2% active return with 4% tracking error, giving 0.5.
Exam trap. This statement is false: The information ratio uses market risk.
Benchmark selection
A good benchmark is appropriate, investable, measurable and specified in advance, and reflects the manager's style.
Example. A large-cap manager uses a large-cap index.
Exam trap. This statement is false: Any index can serve as a benchmark.
Performance attribution
Attribution splits excess return into sources such as asset allocation, security selection and interaction.
Example. A report shows that stock selection added most of the outperformance.
Exam trap. This statement is false: Attribution shows only total return.
GIPS
GIPS are voluntary global standards for fair presentation and full disclosure of investment performance.
Example. A firm presents performance in line with GIPS.
Exam trap. This statement is false: GIPS are laws enforced by SEBI.
Valuation of securities
Securities in a portfolio are valued as per the norms in the regulations and the agreement, using market prices, and fair value where none exist.
Example. A listed share is valued at its closing price.
Exam trap. This statement is false: Each manager may value securities as it likes.
Standardised PMS performance
SEBI requires portfolio manager performance to be reported on a uniform basis, with returns computed using TWRR through a central platform.
Example. Managers' reported returns are comparable.
Exam trap. This statement is false: Each manager chooses its own method freely.
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 statement best describes “Benchmark selection”?
- Smart beta uses rules-based weights based on factors such as value or low volatility instead of market capitalisation.
- A good benchmark is appropriate, investable, measurable and specified in advance, and reflects the manager's style.
- The disclosure document gives clients the manager's investment approach, fees, risks, performance and other facts, and is filed with SEBI.
- The yield curve plots yields against maturity, and an upward-sloping curve means longer maturities have higher yields.
Q2. Which term is described here? Securities in a portfolio are valued as per the norms in the regulations and the agreement, using market prices, and fair value where none exist.
- Stress testing
- Derivative overlay
- Valuation of securities
- GIPS
Q3. Which term is described here? The money-weighted return is the internal rate of return and is affected by the timing of cash flows.
- Credit risk
- Money-weighted return
- Corporate governance
- Market anomalies
Q4. Which statement best describes “Information ratio”?
- Front running is trading ahead of a client's large order for the manager's own benefit and is a prohibited practice.
- Because PMS holdings are in the client's name, gains, dividends and losses are taxed in the client's hands.
- The information ratio is active return divided by tracking error, showing return per unit of active risk.
- Strategic allocation sets long-term target weights across asset classes, based on objectives and risk, and is reviewed infrequently.
Q5. Which term is described here? SEBI requires portfolio manager performance to be reported on a uniform basis, with returns computed using TWRR through a central platform.
- Bottom-up analysis
- Standardised PMS performance
- Disclosure document
- Discounted cash flow
Q6. Which statement best describes “Performance attribution”?
- In the secondary market, existing securities are traded between investors, giving liquidity and price discovery.
- Attribution splits excess return into sources such as asset allocation, security selection and interaction.
- Clients have rights under the investor charter and can seek redress from the manager, then SEBI's complaint platform and online dispute resolution.
- Weak form efficiency says current prices reflect all past price data, so technical analysis cannot earn excess returns.
Frequently asked questions
How much of NISM Series XXI-B comes from Unit 11?
Unit 11 (Performance measurement, attribution and valuation) usually carries about 8% of the questions. The whole exam has 120 questions and the pass mark is 60%.
What should I study in NISM Series XXI-B Unit 11?
TWRR and MWRR. Sharpe, Treynor, alpha. Attribution. Valuation.
Are these NISM Series XXI-B practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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