NISM Series XXI-A: Portfolio Management (PMS) Mock Test-2/50 NISM Series XXI-A: Portfolio Management (PMS) Mock Test-2 1 / 50Mr. Suresh wants to invest in long term corporate bonds as they are giving higher returns. However his portfolio manager is of a strong belief that inflation and interest rates will be on a rise for the next 2-3 years. Which of these is/are valid arguments to convince Mr. Suresh not to invest in long term corporate bonds? a) Due to rising inflation, the profitability of corporates may be negatively affected leading to corporate default b) The bond prices and market interest rates are inversely related c) Both of the above d) None of the above Explanation:Bond prices and the interest rates have an inverse relationship.Bond prices are sensitive to changes in interest rates. As market rates of interest increase, the market values of the bond portfolios decrease and vice versa.Also, inflation can affect profitability. Inflation impacts different industries differently. Some industries can pass on the increase in the costs of products to their consumers by increasing prices. Their revenue and profits may remain unaffected by inflation. However, some industries are not able to charge the increased costs of production to their consumers. Their profitability suffers due to inflation.2 / 50Government securities carry practically no risk of ________ and, hence are called risk-free or gilt-edged instruments. a) Tradability b) liquidity c) default d) negotiability Explanation:Government securities carry practically no risk of default and are, therefore, called risk-free or gilt-edged instruments. This means the government is highly unlikely to fail in making interest payments or returning the principal.3 / 50The present value is calculated by discounting each cash flow at a rate known as _______. a) Yield to maturity b) Coupon yield c) Risk free rate of return d) Yield to call Explanation:The present value of cash flows from an investment is calculated by discounting each cash flow at the Yield to Maturity (YTM). YTM represents the internal rate of return (IRR) of the bond or investment and reflects the total return if held until maturity, accounting for all future cash flows and their time value.4 / 50The PMS shall disclose the audit observations of the preceding ______ to its clients. a) 5 years b) 2 years c) 3 years d) 1 year Explanation:Portfolio Management Services (PMS) are required to disclose audit observations of the preceding 3 years to their clients. This ensures transparency and provides clients with important information regarding the compliance and financial practices of the PMS.5 / 50What is the YTM of a 10% Coupon Bond of face value of Rs 1000 and which is currently being sold at Rs. 1000 and which has a balance maturity period of 3 years? a) 10% b) 10.3% c) 10.15% d) 10.15% Explanation:The face value of the bond is Rs 1000 and its being sold at Rs. 1000. So the bond is being sold at par. Since the bond is sold at par, the YTM of the bond is equal to the coupon value of the bond. If the bond would’ve traded at premium/discount, the YTM would’ve been lesser/more than the coupon rate. So the YTM will be 10%6 / 50_________ is one of the statutory cost to the investor while engaging PMS. a) Registrars fees b) Auditors fees c) Brokerage charges d) Notary charges Explanation:Statutory Charges means any charge imposed by state or federal government legislation. Notary fees are payable to the notary public at a local court / Sub-registrar office to get a deed / documents notarised.7 / 50Mr. Mehta’s initial contribution is Rs. 2 crores which then rises to Rs. 2 crores 30 lakhs in the first year. Therefore, a performance fee will be payable on Rs. 30 lakhs. Is this statement True or False? a) True b) False Explanation:High Water Mark is the highest value that the portfolio/account has reached. The portfolio manager charges performance based fee only on increase in portfolio value in excess of the previously achieved high water mark.8 / 50A PMS firm has suddenly found that there is a shortage of working capital funds. From the options given below, which will be most acceptable? a) The PMS firm should borrow for short term from a commercial bank by pledging the securities of the client b) The PMS firm should use the common pool of client’s funds in a scheduled commercial bank c) The PMS firm should charge the client under PMS fees and reduce the distributions to be made to the client d) The PMS firm should borrow from a commercial bank for short term Explanation:As per the SEBI Do’s and Don’ts for a portfolio manager: The portfolio manager shall not borrow funds or securities on behalf of the client. It cannot pledge the client’s securities, etc.So, the best option to meet any shortfall of funds for its working capital requirements is to borrow from a commercial bank using its sources.9 / 50An offer to subscribe to securities, made to less than ______ persons, is called private placement of securities. a) 100 b) 150 c) 200 d) 250 Explanation:An offer to subscribe to securities made to less than 200 persons is called a private placement of securities. This is a method of raising capital without making a public offer.10 / 50Mr. Pawan own a house worth Rs 1 crore and has financial assets worth Rs. 40 Lakhs. He also has an outstanding home loan of Rs 20 Lakhs and an outstanding car loan of Rs 3 Lakhs. Calculate the estimated Net Worth of Mr. Pawan. a) Rs. 1.17 crore b) Rs. 1.20 crore c) Rs. 1.40 crore d) Rs. 1.63 crore Explanation:For calculating net worth, all the assets the investor owns, i.e. the house, the car, the investments in stocks, bonds & mutual fund, balance in the saving accounts, value of the jewels owned and the value of all other financial assets and real assets are to be recorded at the estimated market value.Then all the liabilities need to be subtracted from the assets. Liabilities may include the outstanding car loan amount, credit card loans, home loan and any other amount he owes like the personal loan, education loan etc.,. The difference between the value of assets and liability is net worth.In the above question the assets are 1 crore (House) and Rs. 40 Lakhs (Other financialAssets) = Rs 1.40 croreLiabilities are : Outstanding home loan (Rs 20 lakhs) and car loan (Rs 3 lakhs) = Rs 23 lakh Networth = 1.40 crore Less Rs 23 Lakhs = Rs 1.17 crore11 / 50Risks due to sector-specific/company-specific factors are referred to as ________ . a) Systematic risks b) Unsystematic risks c) Speculative risks d) Total risks Explanation:Unsystematic risks are those due to sector-specific/company-specific factors. These risks can be diversified away. Systematic risk is due to common risk factors, like interest rates, exchange rates, and commodity prices. It is linked to supply and demand in various marketplaces. These common risk factors affect all investments directly or indirectly. Systematic risks cannot be diversified away, though they can be hedged.12 / 50Identify the FALSE statement. Dealing in securities shall be deemed to be manipulative or fraudulent if it involves _______. a) Entering into a trade in securities without the intention of performing it b) Selling or pledging of securities in physical or dematerialized form c) Inducing a person from dealing in securities for artificially inflating or depressing the prices in securities d) Inducing any person to subscribe to an issue of shares Explanation:As per SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 : Dealing in securities shall be deemed to be a manipulative, fraudulent, or unfair trade practice if it involves 1. inducing any person to subscribe to an issue of the securities for fraudulently securing the minimum subscription to such issue of securities 2. inducing any person to deal in any securities for artificially inflating, depressing, maintaining, or causing fluctuation in the price of securities 3. entering into a transaction in securities without the intention of performing it or without the intention of change of ownership of such security13 / 50For a person to be qualified as a NRI, he must have stayed outside India for more than days in a previous financial year. a) 150 b) 182 c) 365 d) 280 Explanation:An individual is treated as a resident in India if he stays in India for: (a) 182 days or more during the relevant previous year; or (b) 60 days or more (but less than 182 days) during the relevant previous year and for 365 days or more in the last 4 years. Therefore, if a person stays outside India for more than 182 days, he will be treated as a NRI.14 / 50Which of the following is considered to be an investment objective? a) Current income b) Capital preservation c) Capital appreciation d) All of the above Explanation:Investors’ objectives are identified as risk-return-liquidity. Investors may state their investment objectives in terms of desired return in an absolute or relative sense. Generally, investors invest for the preservation of capital, regular income, and capital appreciation.15 / 50The first step in the investment process is the development of _________. a) Financial statement b) Statement of cash needs c) Objective statement d) Investment Policy Statement Explanation:The portfolio management process involves a set of integrated activities undertaken in a logical, orderly, and consistent manner to create and maintain an optimum portfolio. The first step in the process of portfolio management is the development of a policy statement for the portfolio. It is a road map that identifies investors’ risk appetite and defines investment objectives, goals, and investment constraints.16 / 50__________ marked the beginning of PMS when SEBI issued SEBI (Portfolio Managers) Regulations. a) January 1999 b) January 2010 c) January 1993 d) January 2020 Explanation:January 1993, marked the beginning of the Portfolio Management Service when SEBI issued Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993. These were some of the first few regulations issued by the regulators.17 / 50Except for the one that provides only the __________, every portfolio manager shall appoint a custodian in respect of securities managed or administered by it. a) advisory services b) Non-discretionary services c) discretionary services d) None of the above Explanation:Except for the portfolio manager who provides only the advisory services, every portfolio manager shall appoint a custodian in respect of securities managed or administered by it. Details of the custodian like its Name, Address, SEBI Registration No., and Date of Appointment need to be furnished in the application for obtaining registration to the regulator.18 / 50Which of the following entities is NOT eligible to invest in PMS? a) Association of person b) Partnership Firms c) Proprietorship firms d) None of the above Explanation:All of the above can be invested in PMS. The following entities can invest in PMS: • Individuals • Non-resident Indians (as per the RBI guidelines) • Hindu Undivided Family • Proprietorship firms • Association of person • Partnership Firms • Limited liability Partnership • Trust • Body Corporate19 / 50If there is uncertainty concerning the future payment, the investor would require a return more than the nominal required rate of return. The additional component is called ________. a) Alpha b) Risk-free rate of return c) Risk premium d) Both Alpha and Risk-free rate of return Explanation:The returns from most of the investment opportunities (apart from Government bonds) do not have certainty of the amount and the timing of cash flows. Further, the uncertainty of receiving future cashflows varies amongst investments. In such cases, investors would require compensation for the uncertainty associated with future cash flows. This additional compensation over the nominal risk-free rate is called risk premium. If the investors perceive higher risk (more uncertainty with respect to the future payment), they would demand a higher risk premium.20 / 50Portfolio performance measure of “Information Ratio” _____________. a) calculates average differential return per unit of the variability of differential return b) evaluates portfolio performance based on return per unit of risk c) adjusts portfolio risk to match benchmark risk d) compares portfolio returns to expected returns under CAPM Explanation:If one wishes to determine whether or not an observed alpha is due to skill or chance, we can compute the information (appraisal) ratio. It calculates the average differential return per unit of variability of differential return.21 / 50Why might investors adopt a more aggressive investment approach for low-priority goals? a) Because SEBI mandates it for low-priority goals b) Because low-priority goals have strict timelines c) Because the impact of not reaching the goal is minimal d) Because aggressive investments guarantee higher returns Explanation:Lower importance allows taking higher risks.22 / 50Which of the following best describes the management style of Tactical Asset Allocation (TAA) compared to Strategic Asset Allocation (SAA)? a) Both TAA and SAA are passive management style. b) TAA requires active management, while SAA follows a passive approach. c) TAA is passive, while SAA is active. d) Both TAA and SAA require active management. Explanation:TAA involves active decisions, while SAA is long-term and passive.23 / 50What is the main challenge of factor-based investing? a) Backtesting of strategies are not possible b) Individual factors don't work at all times c) Lacks diversification. d) Guaranteed losses in down markets. Explanation:Different factors perform differently across market cycles.24 / 50Which of the following is NOT allowed as a deduction while computing capital gains for Resident Individuals (RIs) under PMS? a) PMS fees and expenses. b) Distributor commission c) Cost of acquisition of securities. d) Transaction costs directly related to sale. Explanation:These expenses are not allowed as deductions for tax purposes.25 / 50What is the holding period for debt investments to qualify as long-term under PMS? a) More than 6 months b) More than 12 months c) More than 24 months d) More than 36 months Explanation:Debt investments become long-term after 24 months.26 / 50How are management fees, brokerage, and GST treated in PMS for tax deduction purposes? a) Not tax-deductible for individuals. b) Tax-deductible only for NRIs. c) Fully tax-deductible. d) Tax-deductible if income exceeds Rs. 10 lakh. Explanation:These costs cannot be claimed as deductions.27 / 50What is the main advantage of using Time Weighted Rate of Return (TWRR) over other return measures? a) Considers only beginning and ending values b) Eliminates bias due to external cash flowsEliminates bias due to external cash flows c) Uses a single time period for returns d) Simplifies cash flow adjustments Explanation:TWRR provides a true performance measure by removing cash flow effects.28 / 50Which return type is most relevant for investors in different tax brackets? a) Net return b) Pre-tax return c) Post-tax return d) Gross return Explanation:Post-tax return reflects actual earnings after taxes, making it relevant for investors in different tax brackets.29 / 50For a well-diversified portfolio, which is true about Sharpe and Treynor Ratios? a) Sharpe and Treynor give similar results. b) Treynor ignores risk-free rate. c) Sharpe considers only systematic risk. d) Sharpe is always higher than Treynor. Explanation:Diversification reduces differences between these measures.30 / 50A portfolio allocated 60% to bonds with a return of 8%, while the benchmark allocated 50% to bonds returning 6%. What is the Asset Allocation Effect for bonds? a) 1.0 percent b) 0.8 percent c) 0.6 percent d) 1.2 percent Explanation:It measures excess return generated due to allocation decisions.31 / 50Why do bonds with longer maturities experience greater price fluctuations due to interest rate changes? a) Short-term bonds are more volatile b) Higher coupon payments c) Distant cash flows are more sensitive to rates d) No effect of interest rates on bonds Explanation:Long-term cash flows are more affected by interest rate changes.32 / 50What does the principle “risk leads return” imply? a) Higher returns are achievable only by taking higher risks. b) Investors should only focus on high returns, regardless of risk. c) Risky investments should be avoided at all costs. d) The return on investment determines the level of risk taken. Explanation:Higher potential returns are associated with higher levels of risk.33 / 50What is the real risk-free rate of return? a) The rate of return assuming no inflation and no uncertainty about future cash flows b) The rate of return that includes expected inflation and risk premium c) The rate of return adjusted for risk premium d) The minimum guaranteed return on an investment. Explanation:It represents return without inflation and risk.34 / 50What type of investment risk arises due to government policy changes or instability? a) Exchange rate risk b) Political risk c) Liquidity risk d) Business risk Explanation:Government actions and instability can impact investments.35 / 50Which of the following is NOT considered a security as per the Securities Contracts (Regulation) Act, 1956? a) Fixed Deposits b) Derivatives c) Share and Stocks d) Government Securities Explanation:Fixed deposits are banking products and not securities under the Act.36 / 50Which of the following is NOT a Market Infrastructure Institution? a) Stock Exchanges b) Clearing Corporations c) Commercial Banks d) Depositories Explanation:Commercial banks are intermediaries, not market infrastructure institutions.37 / 50Which of the following relative valuation methods is best suited for capital-intensive industries like infrastructure and telecom? a) Price to Earnings Growth (PEG) Ratio b) EV/EBITDA c) P/E Ratio d) Dividend Discount Model Explanation:EV/EBITDA considers enterprise value and is suitable for such industries.38 / 50How do Category III AIFs differ from other categories of AIFs? a) Allows access to invest in Angel funds and venture capitals. b) Allows access to Invest in Structured Debt c) Allows leverage and use of derivatives d) Allows access to Invest in Private Equity Explanation:They can use advanced strategies like leverage to generate returns.39 / 50What are investment constraints in portfolio management? a) Restriction around number of investors b) Restriction around number of strategies by portfolio manager c) Restriction around investment choices d) Restriction around performance reporting by portfolio manager Explanation:Constraints limit investment options based on rules or preferences.40 / 50How do InvITs generate income for investors? a) From capital appreciation of their investments in infrastructure equity stocks b) From interest income from their infrastructure assets c) From toll collections, tariffs and service fees of their infrastructure assets d) By providing consultancy to the central and state governments Explanation:Income is generated through operations of infrastructure assets.41 / 50Forward Contracts are _________. a) Exchange traded contracts b) Standard maturity date contracts c) Standardised size contracts d) Bilateral Contracts Explanation:Forward contracts are private agreements between two parties without exchange involvement.42 / 50If one entered into a fixed vs floating rate swap, then the interest payment depends _________. a) On a benchmark rate if one is a fixed rate payer b) On the risk free rate of the country if one is a floating rate payer c) On benchmark rate if one is a floating rate payer d) On the risk free rate of the country if one is a fixed rate payer Explanation:Floating rate payments vary based on benchmark interest rates.43 / 50Under SEBI Portfolio Managers Regulations, a portfolio manager must obtain prior approval from SEBI in case of: a) Change in control b) Alteration in client agreements c) Appointment of new employees d) Launch of a new scheme Explanation:Any change in control requires prior approval to protect investor interests.44 / 50What is a key requirement for portfolio managers regarding the Investor Charter? a) notify clients and display it on their website b) submit it only to SEBI c) share it only upon client request d) keep it confidential for internal compliance Explanation:Portfolio managers must inform clients and publish the Investor Charter for transparency.45 / 50In determining the Price of a derivative, which of the following is not used ________. a) Price of underlying asset b) Expiration period of the derivative contract c) Value at Risk of the underlying Asset d) Price Volatility of underlying assets Explanation:Value at Risk is a risk measurement tool and is not used in pricing derivatives.46 / 50When is the renewal of a portfolio management contract considered a fresh placement? a) When SEBI issues a directive b) If the portfolio manager changes the investment strategy c) Only when the client requests modifications d) Upon maturity of the initial period Explanation:Renewal after expiry is treated as a new agreement.47 / 50How does hedging with derivatives differ from traditional risk management? a) Eliminates all market uncertainties b) Increases overall investment risk c) Always more effective than traditional strategies d) Transfers risk to another party instead of avoiding or absorbing it Explanation:Derivatives transfer risk to another party rather than eliminating it.48 / 50Why can’t portfolio managers invest client funds in another portfolio manager’s scheme? a) Avoids double fees and accountability issues b) Restricts flexible investment strategies c) Reduces returns d) Minimizes the diversification benefits Explanation:It prevents multiple layers of fees and unclear accountability.49 / 50Who manages a REIT’s investment portfolio? a) Investment Manager b) Valuer c) Trustee d) Sponsor Explanation:The investment manager is responsible for managing REIT assets.50 / 50What impact does an increase in a bond’s credit rating have on its market price and yield? a) Market price and yield remain unchanged b) Credit rating improvements have no impact on bond pricing c) Yield decreases, Market Price increases d) Yield increases, Market price decreases Explanation:Improved credit rating reduces risk, increasing price and lowering yield.Your score is 0% Restart quiz Exit
