Behavioral Finance
6 questions. Each answer is explained.
Question 1 of 6Practice · Series XXI-B — Portfolio Managers
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Learn these topics
More units in NISM Series XXI-B
- Investment Landscape and Required Return4
- Introduction to Securities Markets and Participants3
- Investing in Stocks and Equity Research7
- Investing in Fixed Income Securities and Bond Valuation6
- Derivatives in Portfolio Management6
- Mutual Fund6
- Role of Portfolio Managers in India8
- Operational Aspects of Portfolio Managers (Onboarding and Fees)8
- Portfolio Management Process and Asset Allocation8
- Taxation6
- Regulatory, Governance and Ethical Aspects of Portfolio Managers8
- Introduction to Indices6
- Concept of Informational Efficiency6
- Introduction to Modern Portfolio Theory6
- Introduction to Capital Market Theory6
- Risk8
- Equity Portfolio Management Strategies14
- Fixed Income Portfolio Management Strategies14
- Performance measurement and evaluation of Portfolio Managers8
- Portfolio Rebalancing6
Exam format
| Questions | 120 · 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 XXI-B Portfolio Managers
Exam rules read on NISM's site on 30 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 30 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 6 questions on Behavioral Finance, with answers
Q1Which bias describes feeling a loss more strongly than an equal-sized gain?
Option A. Overconfidence
Why it is wrong: Overconfidence concerns excessive belief in one’s judgement or precision.
Option B. Mental accounting
Why it is wrong: Mental accounting separates money into psychological categories.
Option C. Anchoring
Why it is wrong: Anchoring concerns excessive reliance on an initial reference point.
Option D. Loss aversion — Correct answer
Answer: D. Loss aversion describes a loss having a stronger psychological impact than an equal gain. It can distort decisions about risk and whether to realise a loss. Remember: Equal monetary gains and losses need not feel equally important.
Hint, shown before you answer in practice mode: Compare the emotional impact of equal gains and losses. Common mistake: Assuming people evaluate gains and losses symmetrically.
XXI-B-083easyconceptual
Q2Which bias most directly explains treating a share’s old purchase price as the main guide to its current value?
Option A. Anchoring — Correct answer
Option B. Mental accounting
Why it is wrong: Mental accounting concerns separate mental categories for money rather than one reference price.
Option C. Framing
Why it is wrong: Framing concerns changes in response caused by how equivalent information is presented.
Option D. Overconfidence
Why it is wrong: Overconfidence concerns excessive belief in personal skill or judgement.
Answer: A. Anchoring occurs when the old purchase price has excessive influence over the current assessment. Current value should be assessed using current evidence rather than that price alone. Remember: A past transaction price is not proof of present investment value.
Hint, shown before you answer in practice mode: Look for an initial number that has gained too much influence. Common mistake: Treating the price paid as an objective measure of what the asset must be worth.
XXI-B-084easyconceptual
Q3An investor treats a dividend as money to spend freely but protects an equal sale receipt as untouchable capital. Which bias is illustrated?
Option A. A preference for market-cap weighted indices
Why it is wrong: Index weighting does not explain psychological labels attached to cash receipts.
Option B. Anchoring to a past market index level
Why it is wrong: The example separates money by source rather than relying on a reference index value.
Option C. Overconfidence in a forecasting model
Why it is wrong: No claim about forecasting skill explains the different treatment.
Option D. Mental accounting — Correct answer
Answer: D. Mental accounting is illustrated because economically interchangeable money is treated differently according to its source. These mental labels can obscure the overall financial position. Remember: Money’s source can create psychological labels without changing its purchasing power.
Hint, shown before you answer in practice mode: Ask whether identical purchasing power is being labelled differently. Common mistake: Analysing each mental account while ignoring the combined portfolio.
XXI-B-085mediumapplication
Q4After several successful forecasts, a manager becomes certain of future accuracy and sharply narrows expected-outcome ranges. Which bias is most likely?
Option A. Anchoring to an original purchase price
Why it is wrong: No original price is driving the manager’s confidence ranges.
Option B. Overconfidence — Correct answer
Option C. Loss aversion after realised losses
Why it is wrong: The described behaviour follows perceived forecasting success rather than fear of a realised loss.
Option D. Mental accounting of separate cash flows
Why it is wrong: The behaviour concerns estimated forecasting precision, not separate money categories.
Answer: B. Overconfidence is likely because the manager overstates the precision of future forecasts after past successes. Outcomes should still be evaluated across a realistic range. Remember: A run of good outcomes does not remove forecasting uncertainty.
Hint, shown before you answer in practice mode: Consider whether past success justifies the claimed certainty. Common mistake: Confusing recent success with evidence of near-certain future judgement.
XXI-B-086mediumapplication
Q5A client accepts a 90% chance of no loss but rejects the equivalent 10% chance of loss. Which bias explains the difference?
Option A. Mental accounting between salary and dividends
Why it is wrong: The example does not separate money according to its source.
Option B. Overconfidence in personal trading ability
Why it is wrong: The decision changes with presentation rather than a claim of personal skill.
Option C. Framing — Correct answer
Option D. Anchoring to the investment’s old purchase price
Why it is wrong: No old purchase price is used as the reference point.
Answer: C. Framing explains the different response because the same probability is presented as a favourable or unfavourable outcome. The economic information is unchanged. Remember: Equivalent information should be compared in a consistent format.
Hint, shown before you answer in practice mode: Check whether the underlying probability changed or only its presentation. Common mistake: Treating differently worded probabilities as different investment risks.
XXI-B-087mediumapplication
Q6A review finds that a client focuses on purchase prices and reacts differently to equivalent gain and loss descriptions. Which process best addresses both distortions?
Option A. Present only favourable descriptions to the client to reduce discomfort
Why it is wrong: This changes persuasion rather than improving the consistency of the decision.
Option B. Use current evidence and a consistent presentation of comparable outcomes — Correct answer
Option C. Keep every purchase price as the valuation target for each holding
Why it is wrong: This reinforces the reference-price distortion rather than correcting it.
Option D. Exclude negative outcomes from the review materials shown to the client
Why it is wrong: Hiding downside information makes the review less balanced and informative.
Answer: B. Using current evidence and a consistent outcome format reduces the influence of both old reference prices and framing. The review should still include meaningful downside possibilities. Remember: Behavioural controls should improve evidence and consistency, not hide unpleasant information.
Hint, shown before you answer in practice mode: Improve how the decision is made rather than merely making it feel comfortable. Common mistake: Trying to remove bias by presenting only the version the client prefers.
XXI-B-088hardapplication
Behavioral Finance: common questions
How many practice questions are there on Behavioral Finance?
6 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 21 practice topics for NISM Series XXI-B, which has 150 questions in total.
Are these real NISM Series XXI-B questions on Behavioral Finance?
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-B?
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.
Introduction to Modern Portfolio Theory
6 questions on Introduction to Modern Portfolio Theory. Its quiz opens on that unit.
Open Introduction to Modern Portfolio TheoryPaper Trading Try it on the practice trading desk