Portfolio Construction Process
11 questions. Each answer is explained.
Question 1 of 10Practice · Series X-A — Investment Adviser (Level 1)
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Learn these topics
More units in NISM Series X-A
- Introduction to Personal Financial Planning4
- Time Value of Money14
- Evaluating the Financial Position of Clients5
- Debt Management and Loans2
- Introduction to the Indian Financial Markets4
- Securities Market Segments21
- Introduction to Investment5
- Investing in Stocks20
- Investing in Fixed Income Securities25
- Understanding Derivatives25
- Mutual Funds25
- Portfolio Manager10
- Overview of Alternative Investment Funds (AIFs)15
- Introduction to Modern Portfolio Theory14
- Portfolio Performance Measurement and Evaluation25
- Operational Aspects of Investment Management15
- Key Regulations15
- Ethical Issues15
- Grievance Redress Mechanism15
Exam format
| Questions | 135 · 1 or 2 marks each |
|---|---|
| Duration | 180 min · 3 hours |
| Pass mark | 60% · 90 of 150 marks |
| Negative marking | 25% · 0.25 or 0.5 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series X-A Investment Adviser (Level 1)
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 11 questions on Portfolio Construction Process, with answers
Q1An adviser is preparing an investment policy statement for a client. Which draft most clearly provides a usable framework for managing and reviewing the portfolio?
Option A. Objectives, risk considerations, liquidity needs, constraints, target allocation and review rules — Correct answer
Option B. A detailed year-by-year return forecast for the portfolio, presented as a guaranteed result
Why it is wrong: A forecast is not a guaranteed outcome and does not substitute for objectives, constraints and governance.
Option C. A list of currently favoured securities with reasons to buy, but no client objectives or constraints
Why it is wrong: A security list alone does not explain what the portfolio is intended to accomplish or the boundaries within which it operates.
Option D. Only the highest historical return the proposed manager has achieved in any single year
Why it is wrong: One past performance number does not specify the client’s goals, permitted risks or portfolio-management process.
Answer: A. These elements connect the portfolio to the client’s needs and provide a basis for implementation and later evaluation. Begin with what the client needs the portfolio to achieve and the risks the client is willing and able to bear. Document relevant liquidity and other constraints, along with the proposed allocation and rules for monitoring or revisiting it. A good framework enables later decisions to be evaluated against the agreed purpose. Historical performance and forecasts may inform analysis, but neither alone constitutes a complete investment policy. Remember: An IPS should explain both the portfolio’s purpose and the boundaries for pursuing it.
Hint, shown before you answer in practice mode: Common mistake: Treating a product shortlist or return forecast as a substitute for a client-specific investment framework.
X-A-188easyconceptual
Q2A client says large market swings do not cause emotional concern. However, all the money under discussion is needed for a fixed education payment in six months, with no alternative funding. Which assessment is most appropriate?
Option A. The client’s comfort with volatility makes the payment deadline irrelevant
Why it is wrong: The non-deferrable cash requirement exists regardless of the client’s attitude to market fluctuations.
Option B. The payment is a long-term goal because education is generally a long-term benefit
Why it is wrong: The relevant investment horizon is when this payment is due, not the length of the benefit received afterwards.
Option C. A high-risk questionnaire result alone establishes suitability for an illiquid investment
Why it is wrong: A questionnaire response does not override the specific liquidity need and absence of backup funding.
Option D. High stated willingness does not remove the low capacity to absorb losses on money needed shortly — Correct answer
Answer: D. Emotional tolerance and the financial ability to withstand losses are separate considerations in the stated funding situation. The client reports comfort with volatility, which concerns willingness rather than funding capacity. The portfolio must finance a fixed payment in six months, and no alternative assets are available. A loss or inability to access cash could prevent the payment. The assessment must therefore recognise the short horizon and limited loss-bearing capacity. A higher stated appetite for risk does not make the imminent obligation disappear. Remember: Assess risk attitude and financial loss-bearing capacity separately, then connect both to the specific goal.
Hint, shown before you answer in practice mode: Common mistake: Letting a risk-tolerance score override a documented near-term cash requirement.
X-A-189mediumconceptual
Q3A client’s own investment policy caps exposure to any one issuer at 8% of the current ₹50 lakh portfolio. Existing exposure to Issuer X is ₹3 lakh. Assume portfolio value stays unchanged and no other exposure to X exists. What additional amount could be invested in X without exceeding this policy cap?
Option A. ₹24,000
Why it is wrong: This applies 8% to the existing holding rather than to the portfolio value specified as the limit base.
Option B. ₹1 lakh — Correct answer
Option C. ₹3 lakh
Why it is wrong: This is the current exposure and does not measure the gap to the policy limit.
Option D. ₹4 lakh
Why it is wrong: This is the maximum total permitted issuer exposure, not the amount available in addition to the existing position.
Answer: B. The cap is 8% × ₹50 lakh = ₹4 lakh. Subtract the existing ₹3 lakh to obtain ₹1 lakh headroom. Calculate the maximum permitted amount using the stated base: 0.08 × ₹50,00,000 = ₹4,00,000. Subtract exposure already present: ₹4,00,000 − ₹3,00,000 = ₹1,00,000 of additional room. This simple calculation assumes portfolio value is unchanged and all issuer exposure has already been included. Other positions or changing valuations would require updating the exposure calculation. Remember: Translate a percentage cap into a total permitted amount before subtracting the existing position.
Hint, shown before you answer in practice mode: Common mistake: Treating a total exposure cap as an additional purchase allowance.
X-A-190easynumerical
Q4A client’s IPS expressly excludes companies earning any revenue from tobacco production. A candidate fund has a high aggregate sustainability score but knowingly holds a tobacco producer. No exception or indirect-holding exemption is allowed in the policy. Which conclusion follows?
Option A. The exclusion is irrelevant because exposure is through a fund
Why it is wrong: The policy explicitly provides no indirect-holding exemption, so the fund wrapper does not resolve the conflict.
Option B. The holding is acceptable whenever expected returns are higher
Why it is wrong: Expected return does not create an exception to the client’s express restriction.
Option C. The aggregate score automatically overrides the client’s exclusion
Why it is wrong: A scoring method and a client-imposed exclusion are different criteria. The question provides no override.
Option D. The candidate fails the stated exclusion despite its aggregate score — Correct answer
Answer: D. A favourable aggregate score does not cancel an explicit holding-level restriction in the client’s policy. The IPS excludes any revenue from the stated activity and explicitly covers indirect holdings without an exemption. The candidate knowingly owns a prohibited business. It therefore fails the particular policy test regardless of its aggregate sustainability score. This conclusion applies the client’s stated preferences. It is not a universal claim about the merits of a sector or about how all sustainability ratings work. A portfolio should not silently replace a hard constraint with a different scoring standard. Remember: Test a candidate against the client’s actual restriction, not only a broad product label.
Hint, shown before you answer in practice mode: Common mistake: Assuming an aggregate sustainability rating proves compliance with every client-specific exclusion.
X-A-191mediumconceptual
Q5A client’s long-term policy allocation is 60% equity and 40% debt. The manager temporarily moves to 50% equity and 50% debt based on a short-term market view, with an intention to return to the policy allocation. How should the temporary change be classified?
Option A. A permanent replacement of the strategic allocation
Why it is wrong: The facts say the long-term target remains 60/40 and the departure is intended to be temporary.
Option B. A corporate action by an underlying issuer
Why it is wrong: The change is a portfolio allocation decision, not an issuer-led change to a security.
Option C. Tactical asset allocation — Correct answer
Option D. Mechanical rebalancing back to the policy target
Why it is wrong: The action moves away from the target, rather than restoring it after drift.
Answer: C. The manager deliberately departs from the strategic mix for a temporary market view while retaining the original policy target. The enduring policy target remains 60% equity and 40% debt. That is the strategic reference point in the question. The temporary 50/50 mix reflects an active market view rather than an attempt to restore the original target after price movements. This makes it tactical allocation. Classification does not establish that the timing decision will succeed or that every mandate permits such departures. Those are separate questions. Remember: Distinguish changing the long-term target, temporarily departing from it and rebalancing back to it.
Hint, shown before you answer in practice mode: Common mistake: Calling every allocation trade rebalancing even when it deliberately moves away from the policy target.
X-A-192easyconceptual
Q6A portfolio’s policy is 60% equity and 40% debt. After market movements, equity is worth ₹150 lakh and debt ₹80 lakh. With no external cash flow or transaction costs, what trade restores the policy mix at these values?
Option A. Buy ₹12 lakh of equity by selling debt
Why it is wrong: This increases the existing equity overweight rather than correcting it.
Option B. Make no trade because equity already exceeds 60%
Why it is wrong: Exceeding the target is the drift that this rebalancing instruction asks to correct.
Option C. Sell ₹12 lakh of equity and buy ₹12 lakh of debt — Correct answer
Option D. Sell ₹30 lakh of equity and buy debt
Why it is wrong: This restores equity to an earlier possible rupee amount rather than to 60% of the current total portfolio.
Answer: C. Total value is ₹230 lakh. The 60% equity target is ₹138 lakh, requiring a ₹12 lakh transfer. Current total = ₹150 lakh + ₹80 lakh = ₹230 lakh. Target equity is 60% × ₹230 lakh = ₹138 lakh. Equity must fall by ₹150 lakh − ₹138 lakh = ₹12 lakh. Investing that amount in debt raises debt to ₹92 lakh, its 40% target. The transfer preserves total value under the question’s no-cost assumptions. In implementation, cash flows, taxes, costs and restrictions may affect how a policy rebalance is performed. Remember: Recalculate target amounts from today’s portfolio value before deciding the trade.
Hint, shown before you answer in practice mode: Common mistake: Rebalancing to old rupee amounts rather than the current policy percentages.
X-A-193mediumnumerical
Q7A portfolio’s strategic mandate is 60% domestic equity and 40% domestic investment-grade bonds. Which benchmark design most closely matches that strategic opportunity set?
Option A. The best-performing balanced fund in its peer group, picked only after the evaluation period has ended
Why it is wrong: An ex-post choice is not a pre-specified representation of the strategic investible opportunity set.
Option B. A documented 60/40 mix of suitable equity and bond total-return indices with a stated rebalancing rule — Correct answer
Option C. A pure domestic equity price index, selected because it has had the lowest return in recent years
Why it is wrong: It omits the bond component and income, and choosing by a favourable recent outcome creates a misleading comparison.
Option D. A foreign commodity index chosen for its low volatility, though unrelated to the permitted investments
Why it is wrong: Its asset exposures and opportunity set do not match the domestic equity-and-bond mandate.
Answer: B. This reflects both asset classes and the strategic weights while making the comparison rule explicit. The mandate has both equity and bonds, at 60/40 strategic weights. Both components should be represented in the proposed benchmark design. Total-return indices incorporate investment income, making the return basis clearer. A stated rebalancing rule defines how component weights are maintained through time. The actual index choices still need review for geography, currency, credit quality and other mandate features. A benchmark should not be chosen after the fact merely to make results look favourable. Remember: Match exposures and return conventions before using a benchmark to judge performance.
Hint, shown before you answer in practice mode: Common mistake: Comparing a balanced portfolio with whichever unrelated index makes its returns appear strongest.
X-A-194mediumconceptual
Q8Two clients are both 40 years old. One has stable income, ample emergency reserves and a distant goal. The other has unstable income, substantial debt payments and a large non-deferrable expense next year. What should the adviser infer from their common age?
Option A. The distant-goal client’s preferences and liquidity needs no longer require assessment
Why it is wrong: A longer horizon does not remove the need to understand other constraints and risk preferences.
Option B. Age alone is insufficient to prescribe the same allocation for both clients — Correct answer
Option C. Both must receive exactly the same equity percentage
Why it is wrong: An age-only rule omits the differing financial positions and constraints explicitly supplied.
Option D. The client with unstable income necessarily has greater capacity for investment loss
Why it is wrong: Unstable income and obligations do not, by themselves, establish higher financial loss-bearing capacity.
Answer: B. Their cash-flow resilience, obligations and goal horizons differ materially despite identical ages. The clients share age, but the question supplies different financial conditions and payment horizons. A next-year obligation and limited resilience require a different liquidity and loss-capacity assessment from a distant goal backed by ample reserves. The adviser should assess each client’s full situation rather than force both into an identical age-based allocation. The facts are insufficient to prescribe a particular numerical equity weight for either client. Remember: Use life stage as context, not as a replacement for client-specific financial analysis.
Hint, shown before you answer in practice mode: Common mistake: Turning an age heuristic into a universal allocation instruction.
X-A-195mediumconceptual
Q9CASE: A ₹40 lakh portfolio starts at 60% equity and 40% bonds. Equity then rises 25% and bonds are flat. What is the equity weight now?
Option A. 60.00%
Why it is wrong: 60% is the starting weight, which drifts when prices move.
Option B. 65.22% — Correct answer
Option C. 75.00%
Why it is wrong: 75% divides ₹30 lakh by the old ₹40 lakh total.
Option D. 85.00%
Why it is wrong: 85% adds the 25% return to the 60% weight.
Answer: B. Equity = ₹24 lakh × 1.25 = ₹30 lakh. Total = ₹30 lakh + ₹16 lakh = ₹46 lakh. Equity weight = ₹30 lakh ÷ ₹46 lakh = 65.22%. Remember: Allocation drift can arise without trading. Recalculate both numerator and denominator.
Hint, shown before you answer in practice mode: Common mistake: Measuring a current holding against the portfolio’s old total value.
X-A-198mediumapplication
Q10CASE: A portfolio has ₹30 lakh in equity and ₹16 lakh in bonds. Its target is 60% equity and 40% bonds. How much equity should be sold and moved to bonds?
Option A. ₹6 lakh
Why it is wrong: ₹6 lakh takes equity back to an old ₹24 lakh, not 60% of today's total.
Option B. ₹3.60 lakh
Why it is wrong: ₹3.60 lakh is how much the 60% target grew, not the sale needed.
Option C. ₹2.40 lakh of bonds should be sold to buy equity instead
Why it is wrong: Selling bonds would make the equity overweight worse.
Option D. ₹2.40 lakh — Correct answer
Answer: D. Target equity = 60% × ₹46 lakh = ₹27.60 lakh. Sell ₹30 lakh − ₹27.60 lakh = ₹2.40 lakh. Remember: Check both resulting balances to confirm that the proposed rebalance achieves the target.
Hint, shown before you answer in practice mode: Common mistake: Selling the entire market gain instead of just the amount above the new target weight.
X-A-199mediumapplication
Q11CASE: A ₹46 lakh portfolio holds ₹3 lakh in Issuer X. The client's policy caps any one issuer at 6% of current value. By how much must the Issuer X position be cut?
Option A. ₹2,76,000
Why it is wrong: ₹2,76,000 is the most allowed, not the cut.
Option B. ₹60,000
Why it is wrong: ₹60,000 applies 6% to ₹40 lakh, not the current ₹46 lakh.
Option C. Zero
Why it is wrong: ₹3 lakh is about 6.5% of ₹46 lakh, above the cap.
Option D. ₹24,000 — Correct answer
Answer: D. Cap = 6% × ₹46 lakh = ₹2,76,000. Cut = ₹3,00,000 − ₹2,76,000 = ₹24,000. Remember: Test issuer limits separately and state how proceeds affect the denominator.
Hint, shown before you answer in practice mode: Common mistake: Assuming an equity/debt rebalance automatically resolves every individual issuer concentration.
X-A-200mediumapplication
Portfolio Construction Process: common questions
How many practice questions are there on Portfolio Construction Process?
11 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 20 practice topics for NISM Series X-A, which has 285 questions in total.
Are these real NISM Series X-A questions on Portfolio Construction Process?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series X-A?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1 or 2-mark question that is 0.25 or 0.5 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Portfolio Performance Measurement and Evaluation
25 questions on Portfolio Performance Measurement and Evaluation. Its quiz opens on that unit.
Open Portfolio Performance Measurement and Evaluation