Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 2 — Questions and Answers
Question 1: Under SEBI Investment Adviser Regulations, an investment adviser providing advice on securities must ensure the advice is based on which primary criterion?
- Maximizing the adviser's commission income
- The client's risk profile and investment objective (Correct answer)
- Current market trends and momentum
- Recommendations from research analysts
Correct answer: The client's risk profile and investment objective
SEBI regulations mandate that investment advice must be grounded in the client's individual risk profile and stated investment objectives.
Question 2: Which metric best captures the excess return of a portfolio per unit of total risk taken?
- Treynor Ratio
- Jensen's Alpha
- Sharpe Ratio (Correct answer)
- Information Ratio
Correct answer: Sharpe Ratio
The Sharpe Ratio divides excess return (over the risk-free rate) by standard deviation, which represents total risk.
Question 3: An investment adviser recommends a client shift from equity to debt funds as the client nears retirement. This strategy is best described as:
- Tactical asset allocation
- Life-cycle or glide-path asset allocation (Correct answer)
- Momentum-based rebalancing
- Core-satellite allocation
Correct answer: Life-cycle or glide-path asset allocation
Life-cycle (glide-path) allocation systematically reduces equity exposure and increases debt as the investor approaches a target date such as retirement.
Question 4: Under the SEBI IA Regulations, how often must an investment adviser conduct a formal review of a client's financial plan?
- Monthly
- Quarterly
- At least once a year (Correct answer)
- Only when the client requests
Correct answer: At least once a year
SEBI requires investment advisers to review each client's financial plan at least annually to ensure it remains suitable.
Question 5: A portfolio has a beta of 1.4. If the market rises by 10%, the expected portfolio return (ignoring alpha) is:
- 10%
- 12%
- 14% (Correct answer)
- 16%
Correct answer: 14%
Expected return = Beta × Market return = 1.4 × 10% = 14%, assuming no alpha contribution.
Question 6: Which type of risk CANNOT be eliminated through diversification within a domestic equity portfolio?
- Industry-specific risk
- Company-specific risk
- Systematic (market) risk (Correct answer)
- Liquidity risk of individual stocks
Correct answer: Systematic (market) risk
Systematic risk is inherent to the entire market and persists even in a well-diversified portfolio.
Question 7: A client has a moderate risk profile and a 10-year horizon. Which asset allocation is MOST appropriate?
- 100% liquid funds
- 20% equity, 80% debt
- 60% equity, 40% debt (Correct answer)
- 100% direct equity in small-cap stocks
Correct answer: 60% equity, 40% debt
A 60/40 equity-debt split balances growth potential with stability, suitable for a moderate-risk investor with a medium-to-long horizon.
Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 2
Under SEBI Investment Adviser Regulations, an investment adviser providing advice on securities must ensure the advice is based on which primary criterion?