Risk, Return and Performance of Funds

NISM Series V-D | 5 marks | Official workbook pages 231-272

What this chapter is about

Connect portfolio drivers to return and risk, then calculate simple, annualised and compounded returns and interpret volatility, beta, duration and credit measures.

Core concepts

• Equity return is driven by business earnings, valuation, dividends and market sentiment. Debt return is driven by accrual, interest-rate movement, credit change and liquidity.
• Fundamental analysis studies business and financial value. Technical analysis studies price and volume. Quantitative analysis applies models and data rules.
• Simple return compares gain with the starting value. Annualised and compounded returns make different holding periods comparable.
• Standard deviation and variance measure fluctuation in periodic returns. Beta measures sensitivity to a market benchmark.
• Modified duration estimates price sensitivity of a debt portfolio to a change in yield. Longer duration usually means greater interest-rate sensitivity.
• Credit risk, concentration, liquidity and tracking risk require separate measures; one statistic cannot capture every dimension.
• Unsystematic risk can be reduced through diversification. Systematic market risk remains.

Formula and calculation sheet

Simple return = (ending value - beginning value + income) / beginning value x 100.

CAGR = (ending value / beginning value) ^ (1 / years) - 1.

Approximate bond price change = -modified duration x change in yield.

Exam focus

• Technical analysis uses price and volume data.
• Standard deviation or variance measures fluctuation; Sharpe ratio is risk-adjusted return.
• Simple return from 120 to 135 is 12.5%.
• Diversification reduces unsystematic risk.

Quick revision - 60 second scan

• Return must be read with risk.
• Standard deviation is total volatility.
• Beta is benchmark sensitivity.
• Duration is interest-rate sensitivity.
• Credit quality and liquidity are separate risks.