Diversification must be checked at the underlying level
Series XIX-A case study · set 3, case 3 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
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The case · stays here for all 4 questions
An investor’s ₹100 lakh alternative-investment portfolio consists of ₹45 lakh in technology companies, ₹35 lakh in consumer companies and ₹20 lakh in healthcare companies. The holdings are spread across three fund names, but the look-through sector totals are as stated. For a simple stress exercise, assume technology values fall by 40%, while the other two sectors stay unchanged. Separately, before any stress occurs, the investor considers adding ₹20 lakh entirely to healthcare. These are two separate calculations, not sequential events. Ignore taxes, costs, leverage and cross-holdings. The distributor must explain why having three fund names alone does not settle the question of diversification.
The stress and new-contribution calculations are separate.
Sector shocks are hypothetical scenarios, not forecasts.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
An investor’s ₹100 lakh alternative-investment portfolio consists of ₹45 lakh in technology companies, ₹35 lakh in consumer companies and ₹20 lakh in healthcare companies. The holdings are spread across three fund names, but the look-through sector totals are as stated. For a simple stress exercise, assume technology values fall by 40%, while the other two sectors stay unchanged. Separately, before any stress occurs, the investor considers adding ₹20 lakh entirely to healthcare. These are two separate calculations, not sequential events. Ignore taxes, costs, leverage and cross-holdings. The distributor must explain why having three fund names alone does not settle the question of diversification.
The stress and new-contribution calculations are separate.
Sector shocks are hypothetical scenarios, not forecasts.
Q1What is the loss under the technology-only stress?
Option A. ₹40 lakh
Why it is wrong: This applies the technology shock to the entire portfolio.
Option B. ₹14 lakh
Why it is wrong: This applies the shock to the consumer allocation.
Option C. ₹18 lakh — Correct answer
Option D. ₹45 lakh
Why it is wrong: This assumes a complete loss in technology.
Answer: C. Technology loss = ₹45 lakh × 40% = ₹18 lakh. The other two sectors are unchanged by the stated stress assumption. Remember: Apply a stress shock to the exposed assets.
Hint, shown before you answer in practice mode: Only the ₹45 lakh technology exposure receives the 40% fall.
XIXA-S3-C03-Q1easynumerical
Q2What is total portfolio value after that stress?
Option A. ₹55 lakh
Why it is wrong: This writes off technology entirely.
Option B. ₹60 lakh
Why it is wrong: This applies a 40% loss to the whole portfolio.
Option C. ₹118 lakh
Why it is wrong: This adds rather than subtracts the loss.
Option D. ₹82 lakh — Correct answer
Answer: D. The value becomes ₹100 lakh − ₹18 lakh = ₹82 lakh. This is a scenario result and says nothing about how likely that scenario is. Remember: Distinguish the size of a stress loss from its probability.
Hint, shown before you answer in practice mode: Subtract the stressed loss from starting value.
XIXA-S3-C03-Q2easynumerical
Q3In the separate contribution scenario, what is technology’s weight after adding ₹20 lakh to healthcare?
Option A. 45.00%
Why it is wrong: This keeps the old denominator after new money is added.
Option B. 25.00%
Why it is wrong: This subtracts the contribution directly from technology value.
Option C. 37.50% — Correct answer
Option D. 54.17%
Why it is wrong: This adds the new healthcare contribution to technology.
Answer: C. The new technology weight is ₹45 lakh ÷ ₹120 lakh × 100 = 37.50%. The added money changes portfolio weights without selling existing technology holdings. Remember: New contributions can change concentration.
Hint, shown before you answer in practice mode: Technology stays ₹45 lakh. The total becomes ₹120 lakh.
XIXA-S3-C03-Q3mediumnumerical
Q4Which observation is best supported by the case?
Option A. Healthcare and technology can never decline together.
Why it is wrong: The assumed stress does not establish their actual correlation.
Option B. Different fund names can still leave a large common sector exposure. — Correct answer
Option C. Three fund names eliminate the possibility of portfolio loss.
Why it is wrong: The stress calculation shows a loss despite three funds.
Option D. A lower technology weight makes all investments risk-free.
Why it is wrong: A weight change does not remove market, liquidity or company risk.
Answer: B. The combined technology exposure is ₹45 lakh even though the investments use several fund names. Underlying holdings and common risk drivers are needed to assess diversification. Remember: Assess overlapping economic exposures, not just the number of funds.
Hint, shown before you answer in practice mode: Look through the wrappers to what the funds own.
XIXA-S3-C03-Q4mediumapplication
Early losses and later distributions
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