Unit ko samjho · NISM Series XXI-A
Portfolio Management Process
22 questions is unit mein
Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.
Is unit mein kya hai
- Which content is most appropriate for an investment policy statement?
- A client is comfortable with volatile investments but needs most of the capital for an essential payment next year and cannot replace a loss. What is the key distinction?
- A financially secure client has ample reserves and a long horizon but says a modest temporary decline would cause immediate selling. What should a distributor do first?
- A client has liquid assets of ₹95 lakh, earmarks ₹15 lakh for emergencies and ₹20 lakh for a committed payment. Assuming no overlap between these reserves, what amount remains for the long-term allocation exercise?
- A goal requires ₹66.55 lakh in three years. ₹50 lakh is available now and no further contributions will be made. What annual compound return is required, ignoring tax and fees?
- A goal costs ₹25 lakh today. Its cost is assumed to increase by 6% annually for five years. What future amount should be planned for, rounded to two decimals in lakh?
- A portfolio starts at ₹100 lakh and pays ₹10 lakh immediately after year 1. Returns are +20% then −20% in Path A, and −20% then +20% in Path B. With no other flows, what are the final values?
- A model portfolio has weights of 60% in an asset with expected return 12%, 30% at 7%, and 10% at 4%. What is the weighted expected portfolio return?
- Other things equal, why can combining assets with less-than-perfect positive correlation reduce portfolio volatility relative to a weighted average of their individual volatilities?
- Two assets have equal 50% weights, annual standard deviations of 20% and 10%, and zero correlation. What is the portfolio standard deviation, rounded to two decimals?
- A client’s policy establishes a long-term 60% equity and 40% debt allocation based on goals and risk constraints. What is this best described as?
- Within permitted policy bands, a manager temporarily reduces equity because of a short-term market assessment and plans to return to the strategic mix. What is this action?
- A portfolio rule selects and weights shares to emphasise a stated value characteristic across many companies. What is the most relevant interpretation?
- A ₹100 lakh portfolio now holds ₹70 lakh in equity and ₹30 lakh in debt. To restore a 60:40 target without external cash flows or costs, what trade is required?
- A portfolio has ₹72 lakh equity and ₹48 lakh debt. A new ₹30 lakh contribution is to be invested so the resulting portfolio remains 60:40, with no sales or price changes. How should the new money be allocated?
- A policy calls for rebalancing only when equity falls below 55% or rises above 65%. The current equity weight is 64%. What does this rule alone require?
- A small allocation drift could be corrected by selling an appreciated holding, but doing so would incur costs and a possible tax liability. What should be assessed?
- A client works for a technology company, receives company shares as compensation and proposes a PMS approach concentrated in technology. What should the risk review consider?
- A client has a fixed education payment due in a foreign currency in three years, while the funding assets are entirely rupee-denominated. What additional planning issue arises?
- A prospect meets the minimum financial eligibility for a service but needs most invested money in six months. The proposed approach holds illiquid assets for several years. What is the key issue?
- In a stated one-period stress scenario, a portfolio starts with 70% equity and 30% debt. Equity falls 25% and debt gains 5%. With no flows or rebalancing, what is the portfolio return?
- A client loses a regular income source and now expects to draw from the portfolio for living costs. The investment policy assumed no withdrawals for ten years. What should happen first?
Zaroori ideas
Practice bank se · 1
Which content is most appropriate for an investment policy statement?
An investment policy statement documents what the portfolio is intended to achieve and the boundaries for pursuing it. Identify the client’s return needs, risk considerations, time horizon, and other restrictions. Use those documented requirements to guide allocation, implementation and review rather than making unrelated trades in isolation. Remember: An IPS is a decision framework, not a performance guarantee or marketing sheet.
Hint Common mistake: Reducing investment policy to a list of products.
XXI-A-092Practice bank se · 2
A client is comfortable with volatile investments but needs most of the capital for an essential payment next year and cannot replace a loss. What is the key distinction?
Risk willingness concerns preferences and behaviour. Risk capacity concerns the financial ability to bear adverse outcomes. The client’s expressed comfort indicates willingness. The near-term essential liability and lack of replacement resources restrict capacity, which must influence the portfolio design. Remember: Assess both willingness and capacity rather than relying on a risk questionnaire alone.
Hint Common mistake: Equating confidence in markets with the ability to absorb a loss.
XXI-A-093Practice bank se · 3
A financially secure client has ample reserves and a long horizon but says a modest temporary decline would cause immediate selling. What should a distributor do first?
A sustainable investment plan must consider both financial resources and the investor’s response to uncertainty. The facts indicate capacity, but the expected reaction suggests low tolerance. Discuss risks, objectives and realistic drawdowns, then develop an approach the client can understand and maintain without assuming that wealth alone settles suitability. Remember: Capacity to take risk and willingness to stay invested must both be assessed.
Hint Common mistake: Using net worth as a substitute for understanding client behaviour.
XXI-A-094Practice bank se · 4
A client has liquid assets of ₹95 lakh, earmarks ₹15 lakh for emergencies and ₹20 lakh for a committed payment. Assuming no overlap between these reserves, what amount remains for the long-term allocation exercise?
Investable capital for one objective should not double count money already assigned to other necessary uses. Confirm that the two reserves are separate and are not counted twice. Available amount = ₹95 lakh − ₹15 lakh − ₹20 lakh = ₹60 lakh. This is a planning amount, not a recommendation to put all of it into PMS. Remember: Allocate uncommitted resources, not an inflated total that includes essential reserves.
Hint Common mistake: Treating all liquid wealth as available for a single long-term strategy.
XXI-A-095Practice bank se · 5
A goal requires ₹66.55 lakh in three years. ₹50 lakh is available now and no further contributions will be made. What annual compound return is required, ignoring tax and fees?
A goal-based required return compounds the initial capital into the target value over the available number of periods. Required annual return = (target/initial value)^(1/years) − 1. (66.55/50)^(1/3) − 1 = 10%. This is a required rate for the goal, not a guaranteed achievable return. Remember: Separate the return needed by a goal from the return an investment can reliably provide.
Hint Common mistake: Averaging a multi-year gain arithmetically.
XXI-A-096Practice bank se · 6
A goal costs ₹25 lakh today. Its cost is assumed to increase by 6% annually for five years. What future amount should be planned for, rounded to two decimals in lakh?
Goal inflation estimates the future cost of the liability, which is separate from the return on the assets used to fund it. Use future cost = present cost × (1 + inflation rate)^years. ₹25 lakh × 1.06^5 = ₹33.45564 lakh, rounded to ₹33.46 lakh. The inflation assumption may differ from the portfolio’s expected return. Remember: Inflate the liability and evaluate the funding assets as separate calculations.
Hint Common mistake: Using simple inflation or substituting an investment-return assumption.
XXI-A-097Practice bank se · 7
A portfolio starts at ₹100 lakh and pays ₹10 lakh immediately after year 1. Returns are +20% then −20% in Path A, and −20% then +20% in Path B. With no other flows, what are the final values?
External withdrawals can make the sequence of returns matter even when the set of annual returns is identical. Path A: (₹100 lakh × 1.20 − ₹10 lakh) × 0.80 = ₹88 lakh. Path B: (₹100 lakh × 0.80 − ₹10 lakh) × 1.20 = ₹84 lakh. Without withdrawals the two compound factors would produce the same final value. Remember: Model cash-flow timing when assessing a withdrawal portfolio’s risk.
Hint Common mistake: Assuming that identical average returns imply identical outcomes with withdrawals.
XXI-A-098Practice bank se · 8
A model portfolio has weights of 60% in an asset with expected return 12%, 30% at 7%, and 10% at 4%. What is the weighted expected portfolio return?
Expected portfolio return is the sum of each asset’s expected return multiplied by its portfolio weight under the stated model. Check that weights sum to 100%: 60% + 30% + 10% = 100%. Expected return = 0.60 × 12% + 0.30 × 7% + 0.10 × 4% = 9.70%. Expectations are not guarantees. Remember: Use portfolio weights rather than averaging asset returns equally.
Hint Common mistake: Adding standalone returns as though every asset represented the whole portfolio.
XXI-A-099Practice bank se · 9
Other things equal, why can combining assets with less-than-perfect positive correlation reduce portfolio volatility relative to a weighted average of their individual volatilities?
Portfolio risk depends on individual asset risks and on how the returns move together. Consider the size of each asset’s fluctuations and the covariance between them. Less-than-perfect co-movement can reduce aggregate variation compared with perfect positive co-movement, but does not generally eliminate losses or all risk. Remember: Diversification is about joint behaviour, not merely adding more holdings.
Hint Common mistake: Assuming that correlation alone establishes a guaranteed portfolio outcome.
XXI-A-100Practice bank se · 10
Two assets have equal 50% weights, annual standard deviations of 20% and 10%, and zero correlation. What is the portfolio standard deviation, rounded to two decimals?
Portfolio variance includes squared weights, individual variances and a covariance term. Standard deviation is its square root. Use σp² = w1²σ1² + w2²σ2² + 2w1w2σ1σ2ρ. With ρ = 0 the covariance term is zero. Variance = 0.25 × 0.04 + 0.25 × 0.01 = 0.0125. Standard deviation = √0.0125 = 11.18%. Remember: Do not confuse variance with standard deviation or assume volatility averages linearly.
Hint Common mistake: Using standard deviations where the formula requires variances.
XXI-A-101Practice bank se · 11
A client’s policy establishes a long-term 60% equity and 40% debt allocation based on goals and risk constraints. What is this best described as?
Strategic allocation sets the long-term mix used to pursue the investor’s goals within constraints. The decision is tied to long-term objectives and risk requirements. Temporary market views or individual trade decisions may be considered separately, subject to the policy and permitted ranges. Remember: An asset weight is a policy exposure, not a return forecast.
Hint Common mistake: Confusing an allocation percentage with an expected or guaranteed return.
XXI-A-102Practice bank se · 12
Within permitted policy bands, a manager temporarily reduces equity because of a short-term market assessment and plans to return to the strategic mix. What is this action?
Tactical allocation changes exposures around a strategic reference to express a market view within the allowed framework. The client’s underlying policy remains the reference. The manager deliberately deviates for a temporary reason and plans to reverse that deviation. That distinguishes the action from resetting long-term policy. Remember: Tactical views should remain distinguishable from changes to the client’s strategic requirements.
Hint Common mistake: Calling every change in weights a new long-term plan.
XXI-A-103Practice bank se · 13
A portfolio rule selects and weights shares to emphasise a stated value characteristic across many companies. What is the most relevant interpretation?
Factor investing organises exposure around defined characteristics rather than treating each selected security as a certain winner. Identify the common characteristic deliberately emphasised by the rule. Assess the resulting portfolio exposures, concentration and implementation. A systematic process is not a guarantee of the characteristic’s reward. Remember: A factor label describes an exposure, not assured outperformance.
Hint Common mistake: Assuming that a rules-based approach eliminates investment uncertainty.
XXI-A-104Practice bank se · 14
A ₹100 lakh portfolio now holds ₹70 lakh in equity and ₹30 lakh in debt. To restore a 60:40 target without external cash flows or costs, what trade is required?
Rebalancing translates target proportions into currency amounts at the current total portfolio value. Target equity = 60% × ₹100 lakh = ₹60 lakh. Current equity is ₹70 lakh. Transfer the ₹10 lakh excess to debt. The total stays ₹100 lakh and the resulting weights are 60:40. Remember: Calculate target amounts using the current portfolio total.
Hint Common mistake: Rebalancing in the wrong direction or to equal weights by habit.
XXI-A-105Practice bank se · 15
A portfolio has ₹72 lakh equity and ₹48 lakh debt. A new ₹30 lakh contribution is to be invested so the resulting portfolio remains 60:40, with no sales or price changes. How should the new money be allocated?
New cash can help maintain or restore allocation without selling existing positions, provided target amounts are calculated on the new total. New total = ₹72 lakh + ₹48 lakh + ₹30 lakh = ₹150 lakh. Targets are equity ₹90 lakh and debt ₹60 lakh. Additional amounts are ₹90 − ₹72 = ₹18 lakh in equity and ₹60 − ₹48 = ₹12 lakh in debt. They total the ₹30 lakh contribution. Remember: Use the post-contribution portfolio size when calculating target holdings.
Hint Common mistake: Applying an arbitrary equal split to new money.
XXI-A-106Practice bank se · 16
A policy calls for rebalancing only when equity falls below 55% or rises above 65%. The current equity weight is 64%. What does this rule alone require?
A threshold rule specifies when a deviation is large enough to trigger action. It is distinct from continuous exact-weight maintenance. Compare 64% with the lower and upper trigger points. It is neither below 55% nor above 65%, so this rule alone does not trigger a trade. Other independent policy conditions could still matter. Remember: Read trigger conditions precisely before taking a rebalancing action.
Hint Common mistake: Treating a tolerance band as though every small deviation must be removed.
XXI-A-107Practice bank se · 17
A small allocation drift could be corrected by selling an appreciated holding, but doing so would incur costs and a possible tax liability. What should be assessed?
Rebalancing decisions involve the benefit of controlling exposures and the costs of changing holdings. Measure the drift and its significance relative to policy tolerances and the client’s constraints. Evaluate transaction costs, tax consequences and alternatives such as directing new cash. Do not assume that a mechanically exact target is always cost-effective. Remember: Rebalancing discipline includes cost awareness, not only a target-weight calculation.
Hint Common mistake: Treating rebalancing as economically free or automatically tax-exempt.
XXI-A-108Practice bank se · 18
A client works for a technology company, receives company shares as compensation and proposes a PMS approach concentrated in technology. What should the risk review consider?
A household’s risk capacity and concentration can depend on human capital, compensation and investments together. Map the client’s salary, share compensation and proposed portfolio exposures. Assess whether a common downturn could affect several of them at once. The concern is aggregate concentration, not a claim that all technology exposures move identically. Remember: Look beyond one account when measuring a client’s economic concentration.
Hint Common mistake: Ignoring salary and employer-stock exposure because they sit outside the PMS statement.
XXI-A-109Practice bank se · 19
A client has a fixed education payment due in a foreign currency in three years, while the funding assets are entirely rupee-denominated. What additional planning issue arises?
Goal planning must specify both the amount and the currency of the liability. Translate the future liability into rupees under plausible exchange-rate scenarios. Assess permitted, suitable ways to manage the mismatch alongside investment and liquidity risk. No specific hedge is automatically required by the facts. Remember: A fixed liability in one currency can be variable in another.
Hint Common mistake: Ignoring currency risk because the foreign institution has quoted a fixed fee.
XXI-A-110Practice bank se · 20
A prospect meets the minimum financial eligibility for a service but needs most invested money in six months. The proposed approach holds illiquid assets for several years. What is the key issue?
Entry eligibility and suitability are separate tests. A client can qualify to invest while a particular approach still conflicts with their needs. Identify the six-month cash requirement and the several-year asset liquidity profile. The mismatch requires attention before proceeding, regardless of whether the client meets the numerical entry threshold. Remember: Eligibility opens a possibility, not a suitability conclusion.
Hint Common mistake: Using the minimum investment amount as the entire client-assessment process.
XXI-A-111Practice bank se · 21
In a stated one-period stress scenario, a portfolio starts with 70% equity and 30% debt. Equity falls 25% and debt gains 5%. With no flows or rebalancing, what is the portfolio return?
A one-period portfolio scenario combines beginning weights with the corresponding asset returns. Equity contribution = 70% × −25% = −17.5 percentage points. Debt contribution = 30% × 5% = +1.5 points. Total = −16%. This is the result of the supplied scenario, not a forecast probability. Remember: Stress-test the whole portfolio with the correct starting weights.
Hint Common mistake: Ignoring the offsetting asset or treating a scenario as a prediction.
XXI-A-112Practice bank se · 22
A client loses a regular income source and now expects to draw from the portfolio for living costs. The investment policy assumed no withdrawals for ten years. What should happen first?
Investment policy is a framework based on client circumstances, so material changes can require a policy review. Estimate the new spending withdrawals and the resources available to support them. Reassess risk capacity, horizon and liquidity before selecting revised allocations or transactions. Do not treat a larger need as proof that higher risk is appropriate. Remember: Update the planning assumptions before changing the trades.
Hint Common mistake: Responding to a funding shortfall with automatic risk escalation.
XXI-A-113Liquidity describes how easily a given quantity can be traded.
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