Portfolio Management Process and Asset Allocation
8 questions. Each answer is explained.
Question 1 of 8Practice · 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
- Taxation6
- Regulatory, Governance and Ethical Aspects of Portfolio Managers8
- Introduction to Indices6
- Concept of Informational Efficiency6
- Behavioral Finance6
- 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 8 questions on Portfolio Management Process and Asset Allocation, with answers
Q1What is the central purpose of an investment policy statement for a client?
Option A. To replace all ongoing portfolio reviews
Why it is wrong: A written policy does not remove the need for monitoring and review.
Option B. To record investment objectives and constraints — Correct answer
Option C. To prescribe the same holdings for every client
Why it is wrong: Different clients can have different objectives, restrictions and portfolios.
Option D. To guarantee the next year’s portfolio return
Why it is wrong: A policy statement cannot guarantee a future investment outcome.
Answer: B. An investment policy statement records the client’s objectives and constraints. It provides a reference for selecting, monitoring and reviewing the portfolio. Remember: A portfolio should be guided by a documented client-specific policy.
Hint, shown before you answer in practice mode: Think about the agreed framework that guides future decisions. Common mistake: Treating the policy statement as a return guarantee or a one-time formality.
XXI-B-049easyconceptual
Q2A known payment must be made next month. Which portfolio constraint does this most directly create?
Option A. A benchmark-licensing constraint
Why it is wrong: Benchmark licensing is unrelated to the timing of the client’s cash requirement.
Option B. A company-governance constraint
Why it is wrong: Company governance does not directly specify the client’s near-term cash need.
Option C. A liquidity constraint — Correct answer
Option D. A voting-rights constraint
Why it is wrong: Voting rights do not determine whether money is available for next month’s payment.
Answer: C. The payment creates a liquidity constraint because the client needs accessible funds at a known near-term date. The portfolio must account for that need. Remember: Known spending requirements should influence portfolio liquidity.
Hint, shown before you answer in practice mode: Focus on when spendable money must be available. Common mistake: Treating the entire portfolio as available for long-term investing.
XXI-B-050easyconceptual
Q3A manager temporarily deviates from long-term policy weights because of a short-term market view. What is this approach called?
Option A. Automatic cash-flow matching
Why it is wrong: Cash-flow matching aligns payments with liabilities rather than expressing a market forecast.
Option B. Strategic asset allocation
Why it is wrong: Strategic allocation sets the long-term policy mix rather than the temporary deviation.
Option C. Pure buy-and-hold implementation
Why it is wrong: Buy-and-hold does not describe an intentional temporary change based on a market view.
Option D. Tactical asset allocation — Correct answer
Answer: D. Tactical asset allocation temporarily changes exposure relative to the strategic mix. It introduces an active decision that should remain within the client’s mandate. Remember: Tactical allocation is a temporary deviation from the strategic policy.
Hint, shown before you answer in practice mode: Compare a long-term policy decision with a temporary active adjustment. Common mistake: Confusing the policy benchmark with every short-term portfolio adjustment.
XXI-B-051mediumapplication
Q4A client has ₹100 lakh and must reserve ₹20 lakh for a payment next year. The agreed plan excludes this reserve from the retirement portfolio. What amount remains for the long-term allocation?
Option A. ₹120 lakh
Why it is wrong: This adds a spending obligation rather than reserving funds for it.
Option B. ₹100 lakh
Why it is wrong: This includes the money expressly reserved for the near-term payment.
Option C. ₹80 lakh — Correct answer
Option D. ₹20 lakh
Why it is wrong: This is the reserve itself, not the remaining long-term investment pool.
Answer: C. ₹80 lakh remains because the plan reserves ₹20 lakh from the ₹100 lakh total. Working: ₹100 lakh − ₹20 lakh = ₹80 lakh. Remember: Different goals can require separately defined investment pools.
Hint, shown before you answer in practice mode: Separate the committed near-term money from the long-term investment pool. Common mistake: Applying a long-term allocation to cash already committed to near-term spending.
XXI-B-052mediumapplication
Q5The client’s ₹100 lakh includes a ₹20 lakh near-term reserve. The remaining retirement pool has a 60% equity and 40% bond target. What is the target equity amount?
Option A. ₹60 lakh
Why it is wrong: This applies the equity weight to the full ₹100 lakh rather than the retirement pool.
Option B. ₹36 lakh
Why it is wrong: This subtracts the reserve after applying a different allocation basis.
Option C. ₹32 lakh
Why it is wrong: This is the 40% bond allocation within the retirement pool.
Option D. ₹48 lakh — Correct answer
Answer: D. The equity target is ₹48 lakh because 60% applies to the ₹80 lakh retirement pool. Retirement pool = ₹100 lakh − ₹20 lakh = ₹80 lakh. Equity target = 0.60 × ₹80 lakh = ₹48 lakh. Remember: A target weight must be applied to its defined portfolio base.
Hint, shown before you answer in practice mode: Identify the portfolio to which the policy percentage applies. Common mistake: Using total wealth when a policy weight applies to only one goal-based pool.
XXI-B-053mediumapplication
Q6The client’s retirement portfolio is ₹80 lakh. Its written policy caps each sector at 20% of that pool, but one sector holds ₹18 lakh. By how much does that holding exceed the policy cap?
Option A. ₹16 lakh
Why it is wrong: This is the maximum permitted holding, not the excess.
Option B. ₹2 lakh — Correct answer
Option C. ₹0 lakh
Why it is wrong: The ₹18 lakh holding exceeds the ₹16 lakh permitted amount.
Option D. ₹4 lakh
Why it is wrong: This does not compare the holding with 20% of the stated ₹80 lakh pool.
Answer: B. The holding exceeds the cap by ₹2 lakh because the policy permits only ₹16 lakh. Maximum = 20% × ₹80 lakh = ₹16 lakh. Excess = ₹18 lakh − ₹16 lakh = ₹2 lakh. This is a hypothetical client-policy cap, not a statutory limit. Remember: Policy limits should be checked against the correct portfolio value.
Hint, shown before you answer in practice mode: Calculate the monetary cap before comparing the actual holding. Common mistake: Reporting the permitted amount when the question asks for the breach amount.
XXI-B-054mediumapplication
Q7The client is comfortable with large market swings but still needs the reserved ₹20 lakh next year. The retirement goal is 15 years away and the two pools have different purposes. Which conclusion best distinguishes willingness from financial capacity?
Option A. A signed risk form removes the need to assess the spending goal
Why it is wrong: Documentation does not remove an actual financial commitment.
Option B. High willingness makes both investment pools equally risk-tolerant
Why it is wrong: The near-term payment still limits the reserve’s capacity to absorb losses.
Option C. High willingness does not remove the reserve’s short-term constraint — Correct answer
Option D. The long retirement horizon automatically applies to all the money
Why it is wrong: The reserve has its own shorter horizon and cannot inherit the retirement horizon.
Answer: C. High willingness does not remove the reserve’s constraint because that money must still meet a near-term obligation. The retirement pool can have a different capacity for risk. Remember: Risk willingness, risk capacity and goal horizon are related but distinct.
Hint, shown before you answer in practice mode: Evaluate the client’s attitude and the consequences of a loss separately. Common mistake: Using a confident client’s attitude as the only measure of suitable risk.
XXI-B-055hardapplication
Q8The retirement benchmark starts a year at 60% equity and 40% bonds, with no intra-year rebalancing. Equity returns 12% and bonds return 5%, including income. The managed retirement portfolio earns 10% on the same basis. What is its excess return over the benchmark?
Option A. 2.00 percentage points
Why it is wrong: This compares the portfolio with neither the full policy mix nor its proper weighted return.
Option B. 4.80 percentage points
Why it is wrong: This fails to combine both benchmark asset-class contributions correctly.
Option C. 0.50 percentage points
Why it is wrong: This does not use the stated 60% and 40% weights.
Option D. 0.80 percentage points — Correct answer
Answer: D. The excess return is 0.80 percentage points because the benchmark returns 9.20%. Benchmark return = 0.60 × 12% + 0.40 × 5% = 7.20% + 2.00% = 9.20%. Excess return = 10.00% − 9.20% = 0.80 percentage points. Remember: Evaluate a mixed-asset portfolio against its relevant mixed-asset benchmark.
Hint, shown before you answer in practice mode: Calculate the policy-weighted benchmark before measuring the difference. Common mistake: Comparing the entire portfolio with only its best-performing asset class.
XXI-B-056hardapplication
Portfolio Management Process and Asset Allocation: common questions
How many practice questions are there on Portfolio Management Process and Asset Allocation?
8 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 Portfolio Management Process and Asset Allocation?
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.
Taxation
6 questions on Taxation. Its quiz opens on that unit.
Open TaxationPaper Trading Try it on the practice trading desk