The index a fund is compared against. The benchmark is the yardstick, such as the Nifty 50, for judging performance.

The return above the benchmark. Alpha is the extra return over the benchmark, the value a manager adds.

Risk-adjusted return: Sharpe, benchmark and alpha

Q: The Sharpe ratio measures:

Return earned per unit of risk. Sharpe ratio is risk-adjusted return. Higher means more reward for the risk taken.

Q: For an index fund, a low tracking error means it:

Follows its index closely. Tracking error shows how tightly an index fund mirrors its index. Lower is better.

Return for the risk taken

Sharpe, benchmark and alpha

A number on its own says little. The exam wants you to read a return next to two things: the risk it took, and the benchmark it should be beaten against.

This lesson teaches a concept for the NISM Series V-A exam. It is education, not financial advice.

1
A high return with wild swings can be worse than a steady, slightly lower one.
2
The Sharpe ratio measures return earned per unit of risk. Higher is better.
3
A benchmark is the index a fund is judged against, like the Nifty 50.
4
Alpha is the return a fund adds above its benchmark; tracking error shows how closely an index fund follows its index.

Rupee example

Two funds return 12%. The one with a higher Sharpe ratio gave you that 12% with a calmer ride.

Practice

🔥 0 streak

Real exam format. Answer by voice, tap, or press 1 to 4. No negative marking, so always attempt.

Answer by voice

Tap the mic and say A, B, C or D. Typing is optional.

The Sharpe ratio measures:

Sharpe ratio is risk-adjusted return. Higher means more reward for the risk taken.

It is not raw return, cost or size.

A benchmark is:

The benchmark is the yardstick, such as the Nifty 50, for judging performance.

It is not a fee, bond or person.

Alpha is:

Alpha is the extra return over the benchmark, the value a manager adds.

Tax, lock-in and NAV are different things.

For an index fund, a low tracking error means it:

Tracking error shows how tightly an index fund mirrors its index. Lower is better.

Index funds aim to match, not beat, the index.

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NISM V-A syllabus

1What a mutual fund really is

2How a fund is built

3Who watches over it

4The offer document, decoded

5Getting funds to investors

6Selling the right way

8NAV, loads and the daily price

9Types of schemes, and picking one

10Return, risk and performance

11How gains are taxed

12Serving the investor

See the full roadmap →