Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 4 — Questions and Answers
Question 1: Which risk assessment tool is used to estimate the maximum potential loss in a portfolio over a given time period at a specified confidence level?
- Standard deviation
- Beta coefficient
- Value at Risk (VaR) (Correct answer)
- Coefficient of variation
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) quantifies the maximum expected loss over a defined period at a given confidence level (e.g., 95% or 99%).
Question 2: An investment adviser recommends a product in which the adviser's associate holds a significant stake without disclosing this to the client. This violates which principle?
- Suitability obligation
- Fiduciary duty and disclosure requirement (Correct answer)
- Portfolio diversification mandate
- KYC compliance
Correct answer: Fiduciary duty and disclosure requirement
Failing to disclose a related-party interest breaches the adviser's fiduciary duty and SEBI's mandatory disclosure requirements.
Question 3: Which of the following is an example of tactical asset allocation?
- Maintaining a fixed 60/40 equity-debt ratio regardless of market conditions
- Temporarily overweighting equities because valuations appear attractive (Correct answer)
- Setting asset class weights based on the client's age
- Rebalancing back to target weights after market movements
Correct answer: Temporarily overweighting equities because valuations appear attractive
Tactical asset allocation involves short-term, opportunistic deviations from the strategic target based on market outlook or valuations.
Question 4: Modified duration of a bond fund is 5 years. If interest rates rise by 1%, the approximate change in the fund's NAV is:
- +5%
- −5% (Correct answer)
- +1%
- −1%
Correct answer: −5%
NAV change ≈ −Modified Duration × Change in yield = −5 × 1% = −5%; bond prices fall when rates rise.
Question 5: Which SEBI regulation governs the registration and conduct of investment advisers in India?
- SEBI (Portfolio Managers) Regulations, 2020
- SEBI (Investment Advisers) Regulations, 2013 (Correct answer)
- SEBI (Mutual Funds) Regulations, 1996
- SEBI (Research Analysts) Regulations, 2014
Correct answer: SEBI (Investment Advisers) Regulations, 2013
The SEBI (Investment Advisers) Regulations, 2013 establish the framework for registration, conduct, and obligations of investment advisers.
Question 6: A client with low risk tolerance is invested in mid-cap equity funds. The adviser's FIRST recommended action should be:
- Continue the investment since returns are good
- Immediately liquidate all holdings
- Review suitability and recommend reallocation to lower-risk instruments (Correct answer)
- Add more mid-cap funds to average the cost
Correct answer: Review suitability and recommend reallocation to lower-risk instruments
When a client's holdings do not match their risk profile, the adviser must first review suitability and recommend appropriate reallocation.
Question 7: Which of the following statements about the efficient frontier is CORRECT?
- Portfolios on the efficient frontier offer the highest possible return for any given level of risk (Correct answer)
- Portfolios below the efficient frontier are overvalued
- The efficient frontier includes only fixed-income assets
- Portfolios on the efficient frontier always have zero correlation among assets
Correct answer: Portfolios on the efficient frontier offer the highest possible return for any given level of risk
The efficient frontier represents the set of optimal portfolios that maximize expected return for each level of risk (standard deviation).
Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 4
Which risk assessment tool is used to estimate the maximum potential loss in a portfolio over a given time period at a specified confidence level?