Unit study guide · NISM Series X-A
Portfolio Construction Process
11 questions in this unit
What this unit covers
- An adviser is preparing an investment policy statement for a client. Which draft most clearly provides a usable framework for managing and reviewing the portfolio?
- A 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?
- A 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?
- A 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?
- A 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?
- A 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?
- A portfolio’s strategic mandate is 60% domestic equity and 40% domestic investment-grade bonds. Which benchmark design most closely matches that strategic opportunity set?
- Two 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?
- CASE: 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?
- CASE: 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?
- CASE: 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?
Key ideas
From the practice bank · 1
An adviser is preparing an investment policy statement for a client. Which draft most clearly provides a usable framework for managing and reviewing the portfolio?
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 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 Common mistake: Treating a product shortlist or return forecast as a substitute for a client-specific investment framework.
X-A-188From the practice bank · 2
A 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?
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 Common mistake: Letting a risk-tolerance score override a documented near-term cash requirement.
X-A-189From the practice bank · 3
A 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?
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 Common mistake: Treating a total exposure cap as an additional purchase allowance.
X-A-190From the practice bank · 4
A 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?
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 Common mistake: Assuming an aggregate sustainability rating proves compliance with every client-specific exclusion.
X-A-191From the practice bank · 5
A 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?
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 Common mistake: Calling every allocation trade rebalancing even when it deliberately moves away from the policy target.
X-A-192From the practice bank · 6
A 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?
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 Common mistake: Rebalancing to old rupee amounts rather than the current policy percentages.
X-A-193From the practice bank · 7
A portfolio’s strategic mandate is 60% domestic equity and 40% domestic investment-grade bonds. Which benchmark design most closely matches that strategic opportunity set?
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 Common mistake: Comparing a balanced portfolio with whichever unrelated index makes its returns appear strongest.
X-A-194From the practice bank · 8
Two 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?
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 Common mistake: Turning an age heuristic into a universal allocation instruction.
X-A-195From the practice bank · 9
CASE: 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?
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 Common mistake: Measuring a current holding against the portfolio’s old total value.
X-A-198From the practice bank · 10
CASE: 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?
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 Common mistake: Selling the entire market gain instead of just the amount above the new target weight.
X-A-199From the practice bank · 11
CASE: 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?
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 Common mistake: Assuming an equity/debt rebalance automatically resolves every individual issuer concentration.
X-A-200Liquidity describes how easily a given quantity can be traded.
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