What is the Sharpe ratio formula?

Sharpe Ratio = (Fund Return – Risk-Free Rate) ÷ Standard Deviation. It measures return per unit of total risk. A ratio above 1 is generally considered good; the higher the better when comparing similar funds.

What does beta measure in mutual funds?

Beta measures a fund's sensitivity to market (benchmark) movements. Beta of 1 = moves in line with the market. Beta >1 = amplified volatility. Beta <1 = muted volatility. Beta measures only systematic (market) risk.

What is alpha in mutual fund performance?

Alpha is the excess return above what beta predicts. Positive alpha means the fund manager added value beyond the benchmark. Negative alpha means underperformance after adjusting for market risk.

What does standard deviation measure in a mutual fund?

Standard deviation measures total return volatility — how much annual returns deviate from the average. Higher standard deviation = higher risk. Unlike beta, it captures both systematic and unsystematic risk.

NISM V-A Chapter 10: Sharpe, Beta & Alpha Explained for 7 (2026)

Q: What is alpha in mutual fund performance?

Alpha is the excess return above what beta predicts. Positive alpha means the fund manager added value beyond the benchmark. Negative alpha means underperformance after adjusting for market risk.

Q: What is the difference between CAGR and absolute return?

Absolute return is total % gain with no time adjustment. CAGR annualises the return for comparison across different holding periods. For investments held over 1 year, CAGR is the appropriate metric.

Q: What does standard deviation measure in a mutual fund?

Standard deviation measures total return volatility — how much annual returns deviate from the average. Higher standard deviation = higher risk. Unlike beta, it captures both systematic and unsystematic risk.

NISM V-A Chapter 10 carries 7 marks. Master Sharpe, Beta & Alpha metrics to interpret fund performance data. Learn how distributors compare funds and explain risk to clients.

Why Does NISM V-A Test Risk Metrics So Heavily?

Chapter 10 carries 7 marks and tests whether you can interpret fund performance data — not just define terms. These metrics are what you'll use daily as a distributor to compare funds and explain risk to clients. The exam tests both definitions and numerical interpretation.

What Is Standard Deviation and What Does It Measure?

Standard DeviationMeasures the volatility of a fund's returns — how much returns deviate from the average. A fund with 12% average return and 5% standard deviation typically delivers returns between 7% and 17% in any given year. Higher standard deviation = higher risk.

Two funds with identical average returns but different standard deviations are not equivalent — the higher-SD fund is riskier. The exam often asks you to compare funds on this basis.

What Is the Sharpe Ratio and How Do You Calculate It?

Sharpe Ratio(Fund Return – Risk-Free Rate) ÷ Standard Deviation. Measures return earned per unit of total risk taken. A higher Sharpe ratio means better risk-adjusted performance. Generally, a Sharpe ratio above 1 is considered good; above 2 is excellent.

> 1Sharpe ratio threshold for "good" risk-adjusted performance — the higher the better, all else equal

What Is Beta and How Does It Differ from Standard Deviation?

BetaMeasures a fund's sensitivity to market movements relative to its benchmark. Beta of 1 = moves in line with the market. Beta > 1 = amplified market moves (more volatile). Beta < 1 = dampened market moves (less volatile). Beta measures systematic (market) risk only — not total risk.

Standard deviation measures total risk (systematic + unsystematic). Beta measures only systematic risk. For a well-diversified portfolio, most unsystematic risk is eliminated, making beta the relevant measure.

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What Is Alpha and Why Does It Matter?

AlphaThe excess return of a fund above what its beta would predict given market performance. Positive alpha = fund manager added value above the benchmark. Negative alpha = underperformance after adjusting for market risk. Alpha is the purest measure of fund manager skill.

Exam question pattern: "Fund A has beta 1.2 and alpha 0.5. Fund B has beta 0.8 and alpha -0.3. Which fund manager added more value?" Answer: Fund A — positive alpha means the manager beat the risk-adjusted benchmark.

What Is the Difference Between CAGR and Absolute Return?

Absolute return measures total percentage gain from investment to redemption with no time adjustment. CAGR (Compound Annual Growth Rate) annualises the return to enable comparison across different holding periods. For any holding period over 1 year, CAGR is the appropriate return metric.

Chapter 10 Practice Questions

Q1. Fund A: return 15%, risk-free rate 6%, standard deviation 9%. What is the Sharpe ratio?

Answer: 1.0. Sharpe = (15 – 6) ÷ 9 = 9 ÷ 9 = 1.0

Q2. A fund has beta of 1.5. If the market rises 10%, what is the expected fund return (ignoring alpha)?

Answer: 15%. Beta 1.5 × market return 10% = 15%. The fund amplifies market movements by 1.5x.

Q3. What does a negative alpha indicate about a fund?

Answer: The fund underperformed its benchmark on a risk-adjusted basis. The fund manager did not add value — the fund delivered less return than its level of systematic risk would predict.

Practice all risk-return calculations — BullWiser NISM Mock Test →

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Continue to Chapter 11: Scheme Performance or back to the full NISM V-A guide.