Investment Advisor NISM Series-X-A: Investment Adviser (Level 1) 4 — Questions and Answers
Question 1: An investment adviser charges a flat annual fee of INR 50,000 regardless of portfolio size. This fee structure is best described as:
- Asset-under-management (AUM) fee
- Performance fee
- Fixed fee (Correct answer)
- Trail commission
Correct answer: Fixed fee
A flat annual fee that does not vary with portfolio size or performance is classified as a fixed fee model.
Question 2: Under PMLA (Prevention of Money Laundering Act), investment advisers are classified as:
- Scheduled financial institutions
- Reporting entities (Correct answer)
- Supervisory authorities
- Non-obligated entities
Correct answer: Reporting entities
Investment advisers are designated as reporting entities under PMLA and must file suspicious transaction reports (STRs) with FIU-IND.
Question 3: A portfolio returned 10% while the market returned 8%. If the portfolio's beta is 1.0 and the risk-free rate is 4%, what is the portfolio's Jensen's alpha?
- 2% (Correct answer)
- 0%
- 4%
- -2%
Correct answer: 2%
Alpha = Actual Return − [Rf + β(Rm−Rf)] = 10% − [4% + 1.0×(8%−4%)] = 10% − 8% = 2%.
Question 4: Which of the following is an example of systematic risk?
- A company's CEO resigns unexpectedly
- A product recall by a specific manufacturer
- A rise in nationwide interest rates (Correct answer)
- Fraud discovered at a single firm
Correct answer: A rise in nationwide interest rates
Systematic risk affects the entire market — like interest rate changes — and cannot be eliminated through diversification.
Question 5: SEBI requires investment advisers to maintain records of client interactions and advice given for a minimum of:
- 2 years
- 3 years
- 5 years (Correct answer)
- 7 years
Correct answer: 5 years
SEBI IA Regulations mandate that investment advisers retain records of client interactions, risk profiling, and advice for at least 5 years.
Question 6: A client insists on investing entirely in one sector despite the adviser's recommendation for diversification. The adviser should:
- Comply immediately without comment
- Refuse to advise the client
- Document the client's decision and provide advice noting concentration risk (Correct answer)
- Transfer the client to another adviser
Correct answer: Document the client's decision and provide advice noting concentration risk
Advisers must document client instructions that deviate from recommendations and note the associated risks while respecting client autonomy.
Question 7: Which concept refers to the tendency of investors to hold on to losing investments too long, hoping for a recovery?
- Anchoring bias
- Disposition effect (Correct answer)
- Overconfidence bias
- Herding
Correct answer: Disposition effect
The disposition effect is the behavioral tendency to sell winning investments too early and hold losing investments too long.
Investment Advisor NISM Series-X-A: Investment Adviser (Level 1) 4
An investment adviser charges a flat annual fee of INR 50,000 regardless of portfolio size.
This fee structure is best described as: