Portfolio Management Process
22 questions. Each answer is explained.
Question 1 of 10Practice · Series XXI-A — Portfolio Management Services (PMS) Distributors
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Learn these topics
More units in NISM Series XXI-A
- Investments11
- Introduction to Securities Markets7
- Investing in Stocks15
- Investing in Fixed Income Securities8
- Derivatives7
- Collective Investment Vehicles8
- Role of Portfolio Managers15
- Operational Aspects of Portfolio Managers20
- Performance Measurement and Evaluation of Portfolio Managers15
- Taxation7
- Regulatory, Governance and Ethical Aspects of Portfolio Managers15
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 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 XXI-A Portfolio Management Services (PMS) Distributors
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 22 questions on Portfolio Management Process, with answers
Q1Which content is most appropriate for an investment policy statement?
Option A. Only a report attributing last year’s performance against the benchmark
Why it is wrong: Attribution explains historical outcomes rather than documenting the client’s forward-looking policy requirements.
Option B. Only a valuation worksheet for the largest holding in the portfolio today
Why it is wrong: One security analysis cannot replace the client-level portfolio policy.
Option C. Objectives, constraints and the principles governing portfolio decisions — Correct answer
Option D. Only a transaction blotter recording the trades already completed
Why it is wrong: A blotter records implementation, but does not establish the objectives and constraints governing it.
Answer: C. 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, liquidity 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, shown before you answer in practice mode: Common mistake: Reducing investment policy to a list of products.
XXI-A-092easyconceptual
Q2A 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?
Option A. The payment can be ignored if expected returns are above inflation.
Why it is wrong: A required payment remains relevant even when a forecast return appears attractive.
Option B. A short horizon makes the client legally ineligible for all investments.
Why it is wrong: The facts establish a planning constraint, not a blanket legal prohibition.
Option C. Willingness to take risk is high, but capacity to absorb loss is constrained. — Correct answer
Option D. High willingness automatically establishes high financial capacity.
Why it is wrong: Preferences do not remove a fixed liability or create replacement resources.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Equating confidence in markets with the ability to absorb a loss.
XXI-A-093mediumapplication
Q3A 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?
Option A. Recommend the highest-risk approach solely because the client meets the minimum eligibility rule.
Why it is wrong: Eligibility is not the same as suitability or behavioural fit.
Option B. Ignore the concern, because a wealthy client with ample reserves must simply learn to tolerate volatility.
Why it is wrong: Financial resources do not determine emotional tolerance.
Option C. Promise the client that a long investment horizon prevents all losses in the meantime.
Why it is wrong: A long horizon does not eliminate market fluctuations.
Option D. Explore the client’s risk tolerance and likely behaviour rather than assume wealth settles the allocation. — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Using net worth as a substitute for understanding client behaviour.
XXI-A-094mediumapplication
Q4A 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?
Option A. ₹75 lakh
Why it is wrong: This deducts only the committed payment.
Option B. ₹60 lakh — Correct answer
Option C. ₹80 lakh
Why it is wrong: This deducts only the emergency reserve.
Option D. ₹95 lakh
Why it is wrong: This ignores both earmarked requirements.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Treating all liquid wealth as available for a single long-term strategy.
XXI-A-095mediumnumerical
Q5A 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?
Option A. 33.10%
Why it is wrong: This is the total three-year gain, not an annual rate.
Option B. 9.00%
Why it is wrong: At 9% the three-year compound factor is below the required 1.331.
Option C. 11.03%
Why it is wrong: This divides the total percentage gain by three, using a simple average rather than compounding.
Option D. 10% — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Averaging a multi-year gain arithmetically.
XXI-A-096mediumnumerical
Q6A 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?
Option A. ₹33.46 lakh — Correct answer
Option B. ₹32.50 lakh
Why it is wrong: This uses simple annual additions of 6% of the initial cost.
Option C. ₹18.68 lakh
Why it is wrong: This discounts the current cost instead of inflating it into the future.
Option D. ₹26.50 lakh
Why it is wrong: This applies inflation for one year only.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Using simple inflation or substituting an investment-return assumption.
XXI-A-097mediumnumerical
Q7A 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?
Option A. A: ₹84 lakh. B: ₹88 lakh.
Why it is wrong: This reverses the calculations for the two return sequences.
Option B. A: ₹88 lakh. B: ₹84 lakh. — Correct answer
Option C. A: ₹96 lakh. B: ₹96 lakh.
Why it is wrong: This ignores the withdrawal completely.
Option D. A: ₹86 lakh. B: ₹86 lakh.
Why it is wrong: This compounds first and then subtracts the withdrawal at the end, changing its stated timing.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Assuming that identical average returns imply identical outcomes with withdrawals.
XXI-A-098hardconceptual
Q8A 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?
Option A. 23.00%
Why it is wrong: This adds the three returns without weighting them.
Option B. 8.20%
Why it is wrong: This misapplies the supplied weights or omits part of a weighted contribution.
Option C. 7.67%
Why it is wrong: This equally weights the three returns rather than using the stated allocations.
Option D. 9.70% — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Adding standalone returns as though every asset represented the whole portfolio.
XXI-A-099mediumnumerical
Q9Other things equal, why can combining assets with less-than-perfect positive correlation reduce portfolio volatility relative to a weighted average of their individual volatilities?
Option A. Their returns do not move exactly together, so some ups and downs can offset each other. — Correct answer
Option B. The portfolio return becomes the simple sum of all the asset returns, whatever the weights.
Why it is wrong: Portfolio return depends on weights, and risk depends on joint behaviour.
Option C. Correlation tells us the exact future return of each asset in the portfolio.
Why it is wrong: Correlation is a co-movement measure, not a return forecast or guarantee.
Option D. Each asset’s own volatility falls to zero once it is combined with the others.
Why it is wrong: Individual volatility need not disappear for diversification to reduce portfolio volatility.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Assuming that correlation alone establishes a guaranteed portfolio outcome.
XXI-A-100mediumconceptual
Q10Two 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?
Option A. 15.00%
Why it is wrong: This is the weighted average of volatilities, appropriate only under perfect positive correlation here.
Option B. 11.18% — Correct answer
Option C. 5.00%
Why it is wrong: This subtracts weighted volatilities as though correlation were perfectly negative.
Option D. 12.50%
Why it is wrong: This misreads or rescales the variance instead of taking its square root.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Using standard deviations where the formula requires variances.
XXI-A-101hardnumerical
Q11A 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?
Option A. Performance attribution
Why it is wrong: Attribution explains sources of performance rather than specifying the policy portfolio.
Option B. Strategic asset allocation — Correct answer
Option C. Individual-security selection
Why it is wrong: Security selection chooses holdings within allocations rather than setting the broad equity-debt policy weights.
Option D. Tactical asset allocation
Why it is wrong: Tactical allocation is a temporary active deviation rather than the stated long-term policy mix.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Confusing an allocation percentage with an expected or guaranteed return.
XXI-A-102easyconceptual
Q12Within 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?
Option A. A permanent change in the client’s investment objective
Why it is wrong: No change in the client’s objective is stated.
Option B. Pure passive rebalancing back to the strategic weights
Why it is wrong: The manager is intentionally moving away from the strategic mix in response to a view.
Option C. Tactical asset allocation — Correct answer
Option D. Individual-security selection with unchanged asset-class weights
Why it is wrong: The stated action changes the equity allocation, not merely the shares held inside an unchanged allocation.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Calling every change in weights a new long-term plan.
XXI-A-103mediumapplication
Q13A portfolio rule selects and weights shares to emphasise a stated value characteristic across many companies. What is the most relevant interpretation?
Option A. A promise that the value factor will outperform in every period, good or bad
Why it is wrong: Factors can have uncertain and time-varying realised returns.
Option B. Complete removal of market and sector risk, because so many companies are held
Why it is wrong: A factor portfolio can retain broad-market and other exposures.
Option C. A systematic factor tilt, not a guarantee that every chosen share is undervalued — Correct answer
Option D. Proof that all the selected shares have exactly the same intrinsic value
Why it is wrong: A shared screening characteristic does not establish identical or certain intrinsic values.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Assuming that a rules-based approach eliminates investment uncertainty.
XXI-A-104mediumapplication
Q14A ₹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?
Option A. Sell ₹10 lakh of debt and buy ₹10 lakh of equity.
Why it is wrong: That would increase the existing equity overweight.
Option B. Sell ₹10 lakh of equity and buy ₹10 lakh of debt. — Correct answer
Option C. Sell ₹20 lakh of equity and buy ₹20 lakh of debt.
Why it is wrong: That would produce 50:50 rather than the 60:40 target.
Option D. Make no trade because both asset values are positive.
Why it is wrong: Positive asset values do not establish that target weights are satisfied.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Rebalancing in the wrong direction or to equal weights by habit.
XXI-A-105mediumconceptual
Q15A 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?
Option A. ₹18 lakh to equity and ₹12 lakh to debt — Correct answer
Option B. ₹30 lakh to equity and none to debt
Why it is wrong: That would leave equity at ₹102 lakh of ₹150 lakh, or 68%.
Option C. ₹12 lakh to equity and ₹18 lakh to debt
Why it is wrong: That would leave equity below the 60% target.
Option D. ₹15 lakh to each asset
Why it is wrong: An equal split does not preserve a 60:40 target.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Applying an arbitrary equal split to new money.
XXI-A-106hardnumerical
Q16A 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?
Option A. No threshold-triggered rebalance at 64% — Correct answer
Option B. Immediate rebalancing because every deviation from 60% triggers a trade
Why it is wrong: The supplied rule uses thresholds rather than an exact continuous 60% target.
Option C. Selling all equity because the weight is above 55%
Why it is wrong: The lower threshold is not an upper limit or an exit signal.
Option D. Increasing equity to 65% because it is the upper limit
Why it is wrong: A boundary is not automatically an instruction to invest up to it.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Treating a tolerance band as though every small deviation must be removed.
XXI-A-107easyapplication
Q17A 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?
Option A. Whether calling the transaction rebalancing automatically exempts it from tax
Why it is wrong: The label does not establish a tax exemption.
Option B. Only whether the holding previously rose in price
Why it is wrong: A past gain alone does not determine whether selling now is appropriate.
Option C. Only whether the trade returns weights to the target exactly
Why it is wrong: Exact alignment is one consideration, not the whole economic decision.
Option D. Whether the risk-control benefit justifies those implementation costs under the policy — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Treating rebalancing as economically free or automatically tax-exempt.
XXI-A-108mediumapplication
Q18A 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?
Option A. That employment risk and investment risk are always unrelated, so each is reviewed alone
Why it is wrong: The scenario gives a plausible common economic driver that should be assessed.
Option B. Only the employer shares that the client has already sold, not the ones still held
Why it is wrong: Unrealised holdings and future income dependence can still matter.
Option C. How the client’s job income and financial wealth both depend on similar economic risks — Correct answer
Option D. Only how many different securities the proposed PMS approach will hold
Why it is wrong: A holding count can miss sector and employment-related concentration.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Ignoring salary and employer-stock exposure because they sit outside the PMS statement.
XXI-A-109hardapplication
Q19A 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?
Option A. Rupee assets automatically hedge every foreign-currency obligation.
Why it is wrong: The currency mismatch can remain even if rupee asset values are stable.
Option B. The foreign payment is fixed, so no funding uncertainty remains.
Why it is wrong: The amount is fixed only in the liability currency.
Option C. The rupee cost of the foreign-currency liability may change with the exchange rate. — Correct answer
Option D. The client must speculate in currency derivatives regardless of permissions or costs.
Why it is wrong: Recognising an exposure does not prescribe a particular transaction or remove suitability constraints.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Ignoring currency risk because the foreign institution has quoted a fixed fee.
XXI-A-110hardapplication
Q20A 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?
Option A. The liquidity requirement should be omitted once the application is accepted.
Why it is wrong: It remains material to the client’s ability to use the service appropriately.
Option B. Eligibility proves that every available approach is suitable.
Why it is wrong: Different approaches can carry very different risks and liquidity terms.
Option C. A multi-year holding period guarantees a six-month exit at cost.
Why it is wrong: The proposed horizon does not create that guarantee.
Option D. Meeting an entry threshold does not resolve the mismatch with the liquidity requirement. — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Using the minimum investment amount as the entire client-assessment process.
XXI-A-111easyapplication
Q21In 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?
Option A. −20.00%
Why it is wrong: This adds the two asset returns without using their weights.
Option B. −16.00% — Correct answer
Option C. −10.00%
Why it is wrong: This gives equity and debt equal weights.
Option D. −17.50%
Why it is wrong: This includes the equity loss but omits the debt gain.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Ignoring the offsetting asset or treating a scenario as a prediction.
XXI-A-112hardnumerical
Q22A 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?
Option A. Review the objectives, liquidity needs and risk capacity before changing the investments. — Correct answer
Option B. Pick the latest top-performing security first and review the cash needs afterwards.
Why it is wrong: Security selection should not precede understanding the new financial constraint.
Option C. Increase the portfolio’s risk automatically so that it can replace the lost income faster.
Why it is wrong: A higher required income does not create capacity to bear greater losses.
Option D. Carry on unchanged, because the original policy was labelled as a ten-year plan.
Why it is wrong: A long-term label does not make changed circumstances irrelevant.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Responding to a funding shortfall with automatic risk escalation.
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Portfolio Management Process: common questions
How many practice questions are there on Portfolio Management Process?
22 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 12 practice topics for NISM Series XXI-A, which has 150 questions in total.
Are these real NISM Series XXI-A questions on Portfolio Management 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 XXI-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 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.
Performance Measurement and Evaluation of Portfolio Managers
15 questions on Performance Measurement and Evaluation of Portfolio Managers. Its quiz opens on that unit.
Open Performance Measurement and Evaluation of Portfolio Managers