NISM V-D Risk, Return and Performance of Funds — Practice Questions
Questions on measuring return and risk — absolute, annualised and CAGR returns, standard deviation, beta, Sharpe and Treynor — and the risk factors specific to equity, debt and derivative-using strategies.
35 questions on Risk, Return & Performance in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Absolute, annualised and CAGR returns
- Standard deviation and beta
- Sharpe and Treynor
- Risk factors by scheme type
Free sample questions
1. What does 'spread risk' signify with respect to floating rate debt instruments?
- A. The extent to which investments are diversified across debt mutual funds
- B. Fluctuations in prevailing market interest rates
- C. The extent to which a portfolio is diversified
- D. Changes in the markup over the benchmark rate for floating rate securities ✅
Answer: D — Changes in the markup over the benchmark rate for floating rate securities
Why: In a floating rate debt instrument, the interest rate is not fixed — it keeps changing and is expressed as: Interest Rate = Benchmark Rate + Spread (Markup) For example: MIBOR + 0.50% Spread risk refers to the risk that this markup over the benchmark may change due to market conditions or changes in the issuer’s credit quality. Even if the benchmark rate remains unchanged, changes in the spread can affect the value of the security.
💡 Spread risk = change in the markup over the benchmark (e.g. MIBOR+spread) on floating-rate debt.
2. Identify the security which will be most impacted by interest rate movements in the economy ?
- A. Public Sector Units (PSU) Bonds
- B. Money Market securities
- C. Government securities ✅
- D. Corporate debentures
Answer: C — Government securities
Why: Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. Generally, the longer the maturity of the asset, the more sensitive the asset to changes in interest rates. Higher the duration of a bond, the more its prices will fall when interest rates rise and vice versa. Generally Government securities have a higher duration as compared to PSU bonds and Corporate debentures. Money market securities have the lowest duration.
💡 Longer duration = higher interest-rate sensitivity; G-secs highest, money-market lowest.
3. The Risk Free Return of a scheme is 7% , the beta is 1.6 and the actual return earned is 9 %. What is the Treynor Ratio of this scheme?
- A. 1.25 ✅
- B. 2.50
- C. 1.00074
- D. 2
Answer: A — 1.25
Why: Treynor Ratio = (Return Earned - Risk Free Return) / Beta = (9 - 7) / 1.6 = 2 / 1.6 = 1.25 Treynor Ratio is a risk premium per unit of risk. Higher the Treynor Ratio, better the scheme is considered to be.
💡 Treynor = (Return - Rf)/Beta = (9-7)/1.6 = 1.25.
Practise all 35 Risk, Return & Performance questions
Plus the full 853-question NISM V-D bank and real-feel mock exams.
Other NISM V-D topics
Investment LandscapeConcept & Role of Mutual FundsLegal StructureLegal & RegulatoryScheme Related InformationDistribution & ChannelsNAV, TER & PricingTaxationInvestor ServicesScheme PerformanceScheme SelectionBasics of DerivativesUnderstanding the IndexForwards & FuturesOptionsEquity Derivative StrategiesInterest Rates & Fixed IncomeInterest Rate DerivativesInterest Rate FuturesInterest Rate OptionsInterest Rate Strategies