n NISM Certifications
V-A NISM Series V-A
Medium

Identify the TRUE statement with respect to 'Tracking Error'.

Practice question from NISM Series V A - Mock Test 1 — bank. The correct answer is highlighted below with a full explanation.

Options

  1. Tracking error is calculated as the standard deviation of the excess returns generated by the fund

    Correct answer

  2. B

    While comparing different index funds, one should invest in a fund with high tracking error

  3. Only A is true

    Correct answer

  4. D

    Only B is true

  5. E

    Both A and B are true

Why this is the answer

Tracking error measures how closely a fund follows its benchmark index. It is calculated as the standard deviation of the excess returns of the fund compared to the benchmark. A low tracking error indicates the fund is closely tracking the index, which is desirable for an index fund. Hence, when comparing index funds, it is best to invest in a fund with low tracking error, not high.

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