Free NISM Series-X-A: Investment Adviser (Level 1) Question and Answers — Questions and Answers
Question 1: Let's assume Jay has purchased a pure risk cover product, which means he has purchased ___________.
- Whole life policy
- Unit linked insurance policy
- Endowment policy
- Term insurance policy (Correct answer)
Correct answer: Term insurance policy
A pure risk cover product, also known as pure protection, focuses solely on providing financial protection against a specific risk without any savings or investment component. Term insurance policies fit this description perfectly. They provide coverage for a defined period, paying a death benefit only if the insured dies within that term, and do not accumulate cash value.
Question 2: Which of the following categories of risk applies to an investment in a government security issued with a set interest rate?
- Business risk
- Interest rate risk (Correct answer)
- Credit risk
- Liquidity risk
Correct answer: Interest rate risk
Interest rate risk is the potential for an investment's value to decline due to changes in prevailing interest rates. For a government security issued with a set interest rate (like a bond), if market interest rates rise, newly issued bonds will offer higher yields. This makes the existing bond with its lower fixed rate less attractive, causing its market value to fall.
Question 3: Insurance typically represents _________.
- Risk transfer (Correct answer)
- Risk Retention
- Risk Reduction
- Risk prevention
Correct answer: Risk transfer
Insurance is a mechanism where an individual or entity (the insured) pays a premium to an insurance company (the insurer) to transfer the financial burden of potential future losses. In exchange for the premium, the insurer agrees to compensate the insured for specified losses, effectively shifting the risk from the insured to the insurer. This allows the insured to protect themselves from significant financial impact due to unforeseen events.
Question 4: Which of the following is impacted by financial market activity?
- spending decision by individuals and business firms
- the economy's location in the business cycle
- personal wealth
- All of the above (Correct answer)
Correct answer: All of the above
Financial market activity, such as changes in interest rates, stock prices, or bond yields, significantly influences various aspects of the economy. It affects individuals' and businesses' spending decisions by altering borrowing costs and investment returns. Furthermore, financial markets play a crucial role in determining the economy's position within the business cycle and directly impact personal wealth through changes in investment values.
Question 5: Which one of the following is not a component of personal financial planning?
- Defining a basic asset allocation for the client
- Churning investment portfolio often to achieve best returns (Correct answer)
- Risk profiling of client
- Monitoring achievement of goals periodically
Correct answer: Churning investment portfolio often to achieve best returns
Churning an investment portfolio, which involves excessive buying and selling of securities, is generally detrimental to a client's financial well-being due to high transaction costs and potential tax implications. A core principle of personal financial planning is to create a well-defined, long-term strategy, including appropriate asset allocation and risk profiling, and then monitor it periodically, rather than engaging in frequent, speculative trading. Churning is often associated with unethical practices by advisors seeking to generate commissions.
Question 6: An investor invests in the underlying asset of __________ in order to receive a variable annuity. <br> 1. Debt Instruments <br> 2. Equity <br> 3. Gold
- Only 2 and 3 (Correct answer)
- Only 1 and 3
- Only 1 and 2
- All of the above
Correct answer: Only 2 and 3
A variable annuity's value fluctuates based on the performance of its underlying investment options, which are typically sub-accounts invested in various securities. These sub-accounts commonly include equity funds (stocks) and sometimes commodity funds (like gold), allowing for growth potential. Debt instruments (bonds) are more characteristic of fixed annuities or certain types of mutual funds, but variable annuities specifically offer investment in market-linked assets like equities and commodities for variable returns.
Question 7: A defined contribution plan is _________.
- Voluntary Retirement Scheme
- Unrecognized Provident Fund (Correct answer)
- Leave salary
- Gratuity
Correct answer: Unrecognized Provident Fund
A Defined Contribution (DC) plan is a retirement plan where the employer and/or employee contribute a specific amount regularly, but the final benefit depends on the investment performance of these contributions. An Unrecognized Provident Fund (UPF) in India is a type of provident fund that operates as a defined contribution scheme where contributions are made, but it doesn't receive the same tax benefits as a recognized fund. The other options are different forms of employee benefits or separation packages, not defined contribution plans.
Free NISM Series-X-A: Investment Adviser (Level 1) Question and Answers
Let's assume Jay has purchased a pure risk cover product, which means he has purchased ___________.