Investment Advisor NISM Series-X-A: Investment Adviser (Level 1) 3 — Questions and Answers
Question 1: Which of the following best describes 'dollar-cost averaging' as an investment strategy?
- Investing a lump sum during market lows
- Investing fixed amounts at regular intervals regardless of price (Correct answer)
- Rebalancing the portfolio quarterly
- Selling assets when prices rise by a fixed percentage
Correct answer: Investing fixed amounts at regular intervals regardless of price
Dollar-cost averaging involves investing a fixed amount periodically, buying more units when prices are low and fewer when prices are high.
Question 2: Under SEBI IA Regulations, investment advisers are prohibited from receiving commissions or referral fees from product manufacturers. This principle is called:
- Fee transparency
- Commission ban (Correct answer)
- Arms-length dealing
- Best execution
Correct answer: Commission ban
SEBI mandates a commission-free, fee-only model for investment advisers to eliminate distributor-linked conflicts of interest.
Question 3: When assessing a client's risk capacity, which factor is most relevant?
- Client's investment preferences
- Client's income, liabilities, and financial obligations (Correct answer)
- Client's past investment choices
- Client's age alone
Correct answer: Client's income, liabilities, and financial obligations
Risk capacity is determined by objective financial factors — income, assets, debts, and obligations — not by stated preferences.
Question 4: A bond with a 5% coupon is trading at a premium. Its yield to maturity is therefore:
- Equal to 5%
- Greater than 5%
- Less than 5% (Correct answer)
- Not determinable without duration
Correct answer: Less than 5%
When a bond trades at a premium (above par), its YTM is lower than the coupon rate because the investor pays more than face value.
Question 5: Which SEBI regulation governs the registration and conduct of Portfolio Management Services (PMS) in India?
- SEBI (Mutual Funds) Regulations, 1996
- SEBI (Portfolio Managers) Regulations, 2020 (Correct answer)
- SEBI (Investment Advisers) Regulations, 2013
- SEBI (Intermediaries) Regulations, 2008
Correct answer: SEBI (Portfolio Managers) Regulations, 2020
PMS providers are governed by SEBI (Portfolio Managers) Regulations, 2020, which is separate from the IA Regulations.
Question 6: A client approaches an investment adviser seeking advice only on direct equity stocks. The adviser is not registered for this and refers the client elsewhere. This action demonstrates:
- Incompetence
- Appropriate professional conduct within scope of registration (Correct answer)
- Violation of fiduciary duty
- Solicitation of business
Correct answer: Appropriate professional conduct within scope of registration
Referring clients to appropriately registered professionals for services outside one's scope is correct professional behavior.
Question 7: The Capital Asset Pricing Model (CAPM) formula is: Expected Return = Rf + β × (Rm − Rf). What does 'Rm − Rf' represent?
- Alpha
- Market risk premium (Correct answer)
- Sharpe ratio
- Jensen's alpha
Correct answer: Market risk premium
Rm − Rf is the market risk premium — the excess return investors expect for bearing market risk over the risk-free rate.
Investment Advisor NISM Series-X-A: Investment Adviser (Level 1) 3
Which of the following best describes 'dollar-cost averaging' as an investment strategy?