NISM Series XXI-A: Portfolio Management (PMS) Mock Test-3

The Treynor measure adjusts excess return for systematic risk. It is computed by dividing a portfolio’s excess return, by its beta. As Treynor ratio indicates return per unit of systematic risk. Hence it is a useful measure of performance if an investor wishes to evaluate a portfolio in combination with other actively managed portfolios.

Investors resident in India face certain regulatory constraints such as:

• Access to information: They are prohibited from trading based on material non-public information (insider trading laws).

• Investment in overseas markets: These are regulated under the Liberalised Remittance Scheme (LRS) by the RBI, which limits the amount and nature of overseas investments.

Hence, both points listed are valid regulatory constraints.

As per SEBI Portfolio Managers regulations – The portfolio manager shall furnish periodically a report to the client, as agreed in the contract, but not exceeding a period of three months and as and when required by the client.

The formula to get Net from Gross after tax is –

Net = Gross – (Gross X Tax)

[Let Gross = G]

[Tax is 10% = 10/100 = 0.1]

The Net amount is Rs 25000

25000 = G – (G x 0.1) 25000 = G – 0.1 G

[ 1G – 0.1G = .9G]

25000 = .9G

G= 25000/.9 = 27777.77

People invest to achieve goals. Investment objectives can be defined as investors’ goals expressed in terms of risk, return, and liquidity preferences. The return objective may be simplified as follows:

1. Capital Preservation means minimizing or avoiding the chances of erosion in the principal amount of investment.

2. Capital Appreciation is an appropriate investment objective for those who want their portfolio value to grow over a period of time and are prepared to take risks.

3. Current Income is an investment objective pursued when an investor wants her portfolio to generate income at regular intervals by way of dividend, interest, or rental income rather than appreciation in the value of the portfolio.

Fundamental analysis is the process of determining intrinsic value for the stock. These values depend on underlying economic factors such as future earnings or cash flows, interest rates, and risk variables. By examining these factors, the intrinsic value of the stock is determined.

Investors should buy the stock if its market price is below intrinsic value and not buy, or sell if the market price is above the intrinsic value.

The cash management team works as an interface between the banks and the fund management team–they ensure that money received in the bank when investors purchase units is passed on to the fund managers for further investment in securities and the investors get the redemption proceeds when they submit the redemption request.

People earn money and spend money. They pass through various phases in their life cycle. During some phases, they earn more money than they spend. In other phases, they earn less than they spend. Therefore, sometimes they have to borrow money to meet the shortfall.

Selling securities for which the ownership is not proved will be considered a fraudulent activity.

The client may appoint a chartered accountant to audit the books and accounts of the portfolio manager relating to his transactions and the portfolio manager shall co-operate with such chartered accountant in the course of the audit.

Consolidation Phase: The consolidation or mid-to-late-career stage of the typical life cycle is characterized by the period when income exceeds expenses. As a result, this stage is characterized by the consolidation of an investment portfolio.

Spending Phase: This is the period when living expenses are covered not from earned income but from accumulated assets such as investments and retirement corpus. Because of the heavy reliance on investments in this phase and the unlikelihood of returning to work, the focus is on stability in an investment portfolio.

So in these two phases, it is important to preserve the capital and not invest in volatile investments.

As per SEBI rules – ‘The applicant, its director or partner, principal officer, compliance officer or the employee should not at any time been convicted for any offense involving moral turpitude or has been found guilty of any economic offense’

Systematic risk is defined as risk due to common risk factors, like interest rates, exchange rates, and commodities prices. It is linked to supply and demand in various marketplaces. All investments are affected by these common risk factors directly or indirectly.

Systematic risks cannot be diversified away, though they can be hedged. Systematic risk is measured by Beta. Beta relates the return of a stock or a portfolio to the return on the market index. It reflects the sensitivity of the fund’s return to fluctuations in the market index.

Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the investors (unit holders) who invested in various schemes of the mutual fund.

The INR value of the investment depends on two factors –

1. The USD/INR exchange rate

2. The appreciation/depreciation in the value of the security/asset invested

Normally, if the Rupee appreciates against the Dollar (Rs 74.25 to Rs 71.25 as in the above question) the value of investments will decrease in Rupee terms. But if the value of the security has increased in the US, then the exchange rate loss will be recovered by the price rise.

The Time-weighted rate of return (TWRR) is the same as the geometric return.

The money-weighted rate of return (MWRR) is a measure of the performance of an investment.

The MWRR is calculated by finding the rate of return that will set the present values (PV) of all cash flows equal to the value of the initial investment. The MWRR is equivalent to the Internal Rate of Return (IRR). MWRR can be compared with the TWR, which removes the effects of cash in- and outflows.

SEBI has identified certain provisions of the PMS Regulations that would not be applicable to Eligible Fund managers about their activities as fund managers to Eligible Investment Funds and one of them are – ‘Audit of overseas fund’.

1. Debt funds usually give a limited return depending on the interest rates etc. Equity funds tend to give a higher return. So a high expense ratio in a debt fund will have a much bigger impact on the returns of the debt fund.

2. One must check the credit quality of the portfolio while investing in any debt fund – be it long-term or short-term.

• If a Portfolio Manager believes the equity market is overpriced and due for a correction, the best strategy is to reduce exposure to equities before the downturn.
• This helps in locking in gains and reducing potential losses when the correction occurs.
• The portfolio can be shifted toward defensive assets like bonds, gold, or cash equivalents until valuations become attractive again.

The development of the Investment Policy Statement (IPS) is the key step in the process of portfolio management. IPS is the road map that guides the investment process. Either investors or their advisors draft the IPS specifying their investment objectives, goals, constraints, preferences, and risks they are willing to take.

All investment decisions are based on IPS considering investors’ goals and objectives, risk appetite, etc… Since investors ’ requirements change over some time, IPS also needs to be updated and revised periodically.

The Companies Act has provided an extensive definition of the term body corporate. The term “body corporate” is defined in Section 2(11) of the Companies Act, 2013.

As per SEBI Act – The portfolio manager shall take adequate steps for the redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI informed about the number, nature, and other particulars of the complaints received.

A forward contract is an agreement made directly between two parties to buy or sell an asset on a specific date in the future, at the terms decided today. A party to the contract may default on his obligation if there is an incentive to default.

For eg. A and B enter into a bilateral agreement, where A will purchase 100 kg of rice at Rs.20 per kg from B after 6 months. After 6 months, if the price of rice is Rs.30 in the market then B may forego his obligation to deliver 100 kg of rice at Rs.20 to A. Similarly, if the price of rice falls to Rs.15 then A may purchase from the market at a lower price, instead of honoring the contract.

Impact Cost in equity markets refers to the percentage price movement caused by executing a specific order size relative to the current market price.

It is a measure of liquidity and indicates how much the execution of a trade affects the market price of a security. A lower impact cost implies better liquidity, while a higher impact cost indicates potential challenges in executing large orders without significantly affecting the price.