Introduction to Capital Market Theory
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
- Behavioral Finance6
- Introduction to Modern Portfolio 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 Introduction to Capital Market Theory, with answers
Q1Which risk measures appear on the capital market line and security market line, respectively?
Option A. Beta and beta
Why it is wrong: The capital market line uses total portfolio risk measured by standard deviation.
Option B. Beta and standard deviation
Why it is wrong: This reverses the risk measures used by the two lines.
Option C. Standard deviation and standard deviation
Why it is wrong: The security market line uses systematic risk measured by beta.
Option D. Standard deviation and beta — Correct answer
Answer: D. The capital market line uses standard deviation, while the security market line uses beta. The first concerns efficient portfolios and the second relates expected return to systematic risk. Remember: The two lines use different risk axes and have different applications.
Hint, shown before you answer in practice mode: Distinguish total portfolio volatility from sensitivity to the market. Common mistake: Using beta and total volatility interchangeably.
XXI-B-095easyconceptual
Q2The risk-free rate is 5%, expected market return 11%, and beta 1.5. What return does the capital asset pricing model require?
Option A. 9.00%
Why it is wrong: This calculates only the risk premium and omits the risk-free rate.
Option B. 16.50%
Why it is wrong: This multiplies beta by the full market return instead of the market risk premium.
Option C. 14.00% — Correct answer
Option D. 11.00%
Why it is wrong: This uses the market’s return despite the security’s beta being above one.
Answer: C. The capital asset pricing model requires 14.00% because beta scales the market risk premium. Market premium = 11% − 5% = 6%. Required return = 5% + 1.5 × 6% = 14%. Remember: CAPM applies beta to the market risk premium, not the entire market return.
Hint, shown before you answer in practice mode: Apply beta to the return above the risk-free baseline. Common mistake: Forgetting to subtract and then add back the risk-free component.
XXI-B-096mediumnumerical
Q3A portfolio places 60% in an asset with beta 1.3 and 40% in one with beta 0.8. What is portfolio beta?
Option A. 1.10 — Correct answer
Option B. 0.50
Why it is wrong: This subtracts one beta from the other rather than combining exposures.
Option C. 2.10
Why it is wrong: This adds betas without accounting for portfolio weights.
Option D. 1.05
Why it is wrong: This gives equal weight to the two asset betas.
Answer: A. Portfolio beta is 1.10 because beta combines linearly with the investment weights. Working: 0.60 × 1.3 + 0.40 × 0.8 = 0.78 + 0.32 = 1.10. Remember: Portfolio beta is the weighted average of constituent betas.
Hint, shown before you answer in practice mode: Aggregate market sensitivity according to the portfolio weights. Common mistake: Using the unweighted average when the allocations differ.
XXI-B-097mediumnumerical
Q4A security’s forecast return is 13%, but its beta implies a 10% required return. Where does the forecast plot relative to the security market line?
Option A. Above the line with positive forecast alpha — Correct answer
Option B. Below the line with negative forecast alpha
Why it is wrong: The forecast exceeds rather than falls short of the required return.
Option C. On the line with zero forecast alpha
Why it is wrong: The forecast differs from the required return by three percentage points.
Option D. Below the line with positive forecast alpha
Why it is wrong: A positive return difference places the forecast above the required-return line.
Answer: A. The forecast plots above the line because 13% exceeds the 10% model-required return. This is positive forecast alpha, not a guarantee that the excess return will occur. Remember: A forecast above the security market line implies positive model-relative expected alpha.
Hint, shown before you answer in practice mode: Compare the forecast with the model-required return at the same beta. Common mistake: Treating a forecast opportunity as certain realised outperformance.
XXI-B-098mediumapplication
Q5A two-factor model has a 4% baseline, factor premiums of 5% and 2%, and corresponding loadings 1.2 and 0.5. What return is implied?
Option A. 7.00%
Why it is wrong: This calculates the combined factor contribution but omits the 4% baseline.
Option B. 8.40%
Why it is wrong: This mixes the loadings with the baseline rather than their matching factor premiums.
Option C. 11.00% — Correct answer
Option D. 12.00%
Why it is wrong: This does not apply the stated 0.5 loading to the second factor premium.
Answer: C. The model implies 11.00% because the two factor contributions add to the baseline. First contribution = 1.2 × 5% = 6%. Second contribution = 0.5 × 2% = 1%. Total = 4% + 6% + 1% = 11%. Remember: A multifactor model adds distinct exposure-weighted factor premiums.
Hint, shown before you answer in practice mode: Match each exposure to its own factor premium, then include the baseline. Common mistake: Applying one factor loading to every premium or omitting the baseline.
XXI-B-099hardnumerical
Q6An investor borrows 20% of own capital at 5% and invests 120% in the market, expecting 10% return and 15% volatility. What results?
Option A. 12% expected return and 18% volatility
Why it is wrong: This ignores the interest cost on the borrowed amount.
Option B. 11% expected return and 18% volatility — Correct answer
Option C. 11% expected return and 15% volatility
Why it is wrong: This ignores the effect of leverage on market exposure and volatility.
Option D. 9% expected return and 12% volatility
Why it is wrong: This describes reduced rather than leveraged market exposure.
Answer: B. Expected return is 11% and volatility is 18% under the stated frictionless model. Return on own capital = 1.20 × 10% − 0.20 × 5% = 11%. The borrowing rate is fixed, so volatility = 1.20 × 15% = 18%. Leverage can also magnify realised losses. Remember: Leveraging a market portfolio changes both expected return and total volatility.
Hint, shown before you answer in practice mode: Borrowing adds market exposure but also creates an interest obligation. Common mistake: Adding investment exposure without deducting borrowing cost or increasing risk.
XXI-B-100hardnumerical
Introduction to Capital Market Theory: common questions
How many practice questions are there on Introduction to Capital Market Theory?
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 Introduction to Capital Market Theory?
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.
Risk
8 questions on Risk. Its quiz opens on that unit.
Open RiskPaper Trading Try it on the practice trading desk