NISM Series X-A Chapter 14: Introduction to Modern Portfolio Theory Practice Questions

Question 1

Which of the following is NOT explicitly listed as one of the three categories of liquidity needs for investors in the provided text?

Accepted Answer

Long-term capital growth. The text explicitly lists three categories of liquidity needs: '1. Emergency Cash. 2. Near term goal. 3. Investment Flexibility.' Long-term capital growth is an investment objective, not a category of liquidity need

Question 2

If an investor's primary investment objective is capital preservation, which asset allocation strategy would generally be preferred according to the text?

Accepted Answer

Tilted towards safe bonds and debt securities.. The text states: 'if capital preservation is the primary investment objective, asset allocation will be tilted towards safe bonds and debt securities.'

Question 3

An investor who is afraid of being left out, constantly asks about the latest 'hot topics,' and typically relies on investment advisers but is difficult to deal with due to confused beliefs, would best be categorized as which BB&K personality type?

Accepted Answer

Celebrity. The text describes Celebrities as: 'These people like to be where the action is. They are afraid of being left out. These investors will keep bringing up the latest hot topic... They normally go for investment advisers. However, they are the most difficult investors to deal with because of their own confused beliefs.'

Question 4

The text categorizes the needs for liquidity into three categories. Which of the following is NOT one of these categories?

Accepted Answer

Long-term capital growth. The three categories mentioned are: 1. Emergency Cash, 2. Near term goal, 3. Investment Flexibility. Long-term capital growth is an investment objective, not a liquidity need category

Question 5

An individualist investor, as per the BB&K framework, is characterized by confidence and carefulness. Given these traits, which of the following investment behaviors would an Individualist most likely exhibit?

Accepted Answer

Doing their own thorough research, avoiding extreme volatility, and potentially being a contrarian investor.. The text describes Individualists: "These people have certain degree of confidence about them, but they are also careful, methodical, and analytical. Individualists like to do their own research and tend to avoid extreme volatility. They are often contrarian investors because they do sit back and think about where they want to go and which investments make good value sense."

Question 6

According to the provided text, what is the typical relationship between risk and return in investments?

Accepted Answer

Positive relationship; higher risk leads to higher return.. The text states: 'They need to bear in mind that risk and return have typically positive relationship. Higher the risk, higher the return.'

Question 7

What is the key difference highlighted in the text between 'sustainable investing' and 'ethical investing'?

Accepted Answer

Sustainable investing uses an overall set of guidelines to screen investments, whereas ethical investing is more personalized based on moral principles.. The text states: 'Often ethical investing is used interchangeably with sustainable or socially conscious investing but there is a key difference between the two. The latter is based on an overall set of guidelines that screen out the investments but ethical investing is more personalised.'

Question 8

An individual's monthly spending is INR 75,000. Based on the text's recommendation for an emergency cash reserve, what is the minimum amount of cash or cash-like securities they should generally maintain?

Accepted Answer

INR 1,50,000. The text states, 'The emergency cash reserve is usually measured at two to three months' spending'.
Minimum emergency cash = 2 months * Monthly spending
Minimum emergency cash = 2 * INR 75,000 = INR 1,50,000

Question 9

An investor has two distinct financial goals:
1. Building a retirement corpus, which is a long-term high priority goal.
2. Buying a luxury car, which is a low priority goal.
Based on the text, which investment approach is most appropriate for each goal, respectively?

Accepted Answer

1: Diversified approach utilizing several different asset classes; 2: More aggressive investment approaches.. For long-term high priority goals (like retirement), the text states: 'Because of the long-term nature of such goals, a diversified approach utilizing several different classes of assets is usually preferred.'
For low priority goals (like buying a luxury car), the text states: 'For these goals more-aggressive investment approaches are usually taken.'

Question 10

An investor consistently brings up the latest 'hot topic' in the market, asking their adviser if they should invest, and is visibly anxious about missing out on opportunities. They generally lack their own investment ideas, making them challenging for advisers. According to the Bailard, Biehl & Kaiser (BB&K) framework, which investor personality does this best describe?

Accepted Answer

Celebrity. The text describes the 'Celebrity' quadrant as individuals who 'like to be where the action is. They are afraid of being left out. These investors will keep bringing up the latest hot topic, asking, 'Should I be in this, or should I be in that?' They really do not have their own ideas about investments. These people normally go for investment advisers. However, they are the most difficult investors to deal with because of their own confused beliefs.' This description aligns perfectly with the scenario

Question 11

According to the text, what is the typical relationship between risk, return, and liquidity for investments?

Accepted Answer

Higher risk is associated with higher return, and lower liquidity requires a premium.. The text states, 'Higher the risk, higher the return. On the other hand, liquidity has inverse relationship with return. Relatively illiquid investments require premium for being less liquid, i.e. illiquidity risk premium.' This means lower liquidity (illiquid investments) requires a premium

Question 12

If an investor's primary investment objective is capital preservation, which asset allocation strategy would be most appropriate according to the text?

Accepted Answer

Tilting asset allocation towards safe bonds and debt securities.. The text states, "On the other hand, if capital preservation is the primary investment objective, asset allocation will be tilted towards safe bonds and debt securities."

Question 13

An investor is described as confident, impetuous, willing to take significant risks by concentrating their bets, and preferring not to use investment advisors. According to the Bailard, Biehl & Kaiser (BB&K) framework, which investor personality type best fits this description?

Accepted Answer

Adventurer. The text describes the Adventurer personality as: 'The upper-right corner... represents the adventurer-people who are willing to put it all in one major bet and 'go for it' because they have confidence. ...They are confident as well as impetuous. ...They are willing to take risks, and they normally do not go for the investment advisers. They prefer concentrating their bets.'

Question 14

Which of the following elements is NOT explicitly mentioned as a necessary component or consideration to be included in an Investment Policy Statement (IPS) based on the provided text?

Accepted Answer

Detailed list of specific stock recommendations for the next quarter.. The text mentions: 'The IPS would normally list out the goals of the investor along with their priorities... clear mention of the risk/return profile of the investor along with the liquidity constraints plus naming preferred asset classes even those asset classes that need to be avoided can be mentioned. There has to a systematic review process present in the IPS'. Specific stock recommendations are not mentioned as a standard component of an IPS, which focuses on broader strategy and client profile

Question 15

As per the Reserve Bank of India’s Liberalised Remittance Scheme (LRS) mentioned in the text, what is the maximum amount an Indian resident individual can invest overseas per financial year?

Accepted Answer

USD 250,000. The text clearly states, "...an Indian resident individual can only invest up to $250,000 overseas per year." The footnote also confirms this current limit

Question 16

Which of the following elements is NOT explicitly mentioned as something that should normally be listed or clearly mentioned in an Investment Policy Statement (IPS)?

Accepted Answer

Detailed daily trading instructions for specific securities.. The text mentions goals, priorities, investment objectives, time horizon, risk/return profile, liquidity constraints, preferred/avoided asset classes, and a systematic review process. Detailed daily trading instructions are not mentioned as a normal inclusion

Question 17

According to the Bailard, Biehl & Kaiser (BB&K) framework, which investor personality type is described as being afraid of being left out, frequently asking about the latest hot topics, and often difficult to deal with despite seeking investment advisers?

Accepted Answer

Celebrity. The text describes the Celebrity quadrant: "These people like to be where the action is. They are afraid of being left out. These investors will keep bringing up the latest hot topic, asking, 'Should I be in this, or should I be in that?' They really do not have their own ideas about investments. These people normally go for investment advisers. However, they are the most difficult investors to deal with because of their own confused beliefs."

Question 18

What is the primary distinguishing factor between 'ethical investing' and 'sustainable investing' as described in the chapter?

Accepted Answer

Ethical investing is highly personalized and avoids specific 'sin areas,' while sustainable investing relies on an overall set of guidelines (ESG criteria) to screen investments.. The text states: 'Often ethical investing is used interchangeably with sustainable or socially conscious investing but there is a key difference between the two. The latter [sustainable investing] is based on an overall set of guidelines that screen out the investments but ethical investing is more personalised. So ethical investing would typically avoid sin areas like gambling, alcohol, smoking or even firearms.'

Question 19

An investor who is cautiously trying to preserve their wealth and is definitely not interested in volatility would most likely be classified as which personality type under the Bailard, Biehl & Kaiser (BB&K) framework?

Accepted Answer

Guardian. The text states: 'The lower-left quadrant represents the Guardian personality. ...Guardians are people who are cautiously trying to preserve their wealth. They are definitely not interested in volatility.'

Question 20

An investor has assets worth INR 75,00,000 (house, investments, savings) and liabilities amounting to INR 25,00,000 (home loan, car loan, credit card debt). Based on the text, what is the investor's net worth?

Accepted Answer

INR 50,00,000. The text defines net worth as: 'The difference between the value of assets and the liability is net worth.' Calculation: Net Worth = Assets - Liabilities = INR 75,00,000 - INR 25,00,000 = INR 50,00,000

Question 21

According to the text, what is the typical relationship between liquidity and return?

Accepted Answer

Inverse relationship; relatively illiquid investments require a premium for being less liquid.. The text explicitly states: 'On the other hand, liquidity has inverse relationship with return. Relatively illiquid investments require premium for being less liquid, i.e. illiquidity risk premium.'

Question 22

Which of the following is NOT explicitly mentioned as a component that an Investment Policy Statement (IPS) would normally list out?

Accepted Answer

Specific investment products to be purchased (e.g., names of mutual funds).. The text states that the IPS lists investor goals, priorities, investment objectives, time horizon, risk/return profile, liquidity constraints, and preferred/avoided asset classes. While 'investment strategy and styles' are mentioned as an additional section, specific investment products are not listed as a normal component

Question 23

The text differentiates between sustainable investing and ethical investing. Which of the following statements accurately captures a key difference between the two as presented?

Accepted Answer

Ethical investing is more personalized, whereas sustainable investing is based on an overall set of guidelines that screen out investments.. The text states: 'Often ethical investing is used interchangeably with sustainable or socially conscious investing but there is a key difference between the two. The latter is based on an overall set of guidelines that screen out the investments but ethical investing is more personalised.' Here, 'the latter' refers to sustainable or socially conscious investing

Question 24

As per the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), what is the maximum amount an Indian resident individual can invest overseas per financial year?

Accepted Answer

USD 250,000. The text explicitly states, 'an Indian resident individual can only invest up to $250,000 overseas per year' under the Liberalised Remittance Scheme

Question 25

According to the text, what is the typical relationship between risk and return for investments?

Accepted Answer

Higher risk is typically associated with higher return.. The text states: 'They need to bear in mind that risk and return have typically positive relationship. Higher the risk, higher the return.'

Question 26

As per the Reserve Bank of India's Liberalised Remittance Scheme (LRS) mentioned in the text, what is the maximum amount an Indian resident individual can invest overseas per financial year?

Accepted Answer

$250,000. The text states, 'an Indian resident individual can only invest up to $250,000 overseas per year.' The footnote also confirms this amount

Question 27

According to the text, what is the typical relationship between risk and return in investments?

Accepted Answer

Risk and return have a typically positive relationship.. The text states: 'They need to bear in mind that risk and return have typically positive relationship. Higher the risk, higher the return.'

Question 28

Which of the following is one of the three categories of liquidity needs for investors as identified in the text?

Accepted Answer

Emergency Cash. The text lists "Emergency Cash," "Near term goal," and "Investment Flexibility" as the three categories of liquidity needs

Question 29

An investor whose primary investment objective is capital appreciation should typically allocate funds towards which of the following asset classes, according to the text?

Accepted Answer

High return investments like equity. The text states, 'If the investment objective is capital appreciation, then investments need to be in high return investments (like equity).' Options A and B are generally associated with capital preservation, and D with regular income

Question 30

What is the key difference between ethical investing and sustainable investing, as highlighted in the provided text?

Accepted Answer

Sustainable investing considers ESG criteria, while ethical investing is more personalized, based on moral or ethical principles.. The text states: 'Sustainable investing is a growing field across the world which considers environmental, social and governance (ESG) criteria while selecting investments.' It then clarifies for ethical investing: 'Often ethical investing is used interchangeably with sustainable or socially conscious investing but there is a key difference between the two. The latter is based on an overall set of guidelines that screen out the investments but ethical investing is more personalised.' Ethical investing is described as being 'based on moral or ethical principles' and 'more personalised', often avoiding 'sin areas'

Question 31

In the Bailard, Biehl & Kaiser (BB&K) framework for investor personalities, which personality type is characterized by being confident and impetuous, often preferring to concentrate their bets and having their own ideas about investing?

Accepted Answer

Adventurer. The text describes the Adventurer as: 'The upper-right corner of Figure represents the adventurer-people who are willing to put it all in one major bet and 'go for it' because they have confidence. ... They are confident as well as impetuous.'

Question 32

As per the Reserve Bank of India's Liberalised Remittance Scheme (LRS) mentioned in the text, what is the maximum amount an Indian resident individual can invest overseas per financial year?

Accepted Answer

USD 250,000. The text explicitly states: 'an Indian resident individual can only invest up to $250,000 overseas per year.' Footnote 20 also confirms this: 'allowed to freely remit up to USD 2,50,000 per financial year (April – March)'

Question 33

According to the chapter, what is the typical relationship between risk and return, and liquidity and return?

Accepted Answer

Risk and return have a positive relationship; liquidity and return have an inverse relationship.. The text states, "risk and return have typically positive relationship. Higher the risk, higher the return. On the other hand, liquidity has inverse relationship with return."

Question 34

What is the key difference between ethical investing and sustainable (or socially conscious) investing, as described in the text?

Accepted Answer

Ethical investing is more personalized, using moral principles as the primary filter, whereas sustainable investing is based on an overall set of guidelines.. The text states: 'Often ethical investing is used interchangeably with sustainable or socially conscious investing but there is a key difference between the two. The latter is based on an overall set of guidelines that screen out the investments but ethical investing is more personalised.'

Question 35

An investor's monthly income consists of a salary of ₹1,20,000 and rental income of ₹30,000. Their monthly expenses include a home loan EMI of ₹45,000, utility bills of ₹10,000, and other living expenses totaling ₹60,000. How much amount is available periodically for investment purposes?

Accepted Answer

₹35,000. Total Monthly Income = Salary + Rental Income = ₹1,20,000 + ₹30,000 = ₹1,50,000
Total Monthly Expenses = Home Loan EMI + Utility Bills + Other Living Expenses = ₹45,000 + ₹10,000 + ₹60,000 = ₹1,15,000
Amount Available for Investment = Total Monthly Income - Total Monthly Expenses = ₹1,50,000 - ₹1,15,000 = ₹35,000

Question 36

An investment adviser is working with a client who is confident in their financial decisions but tends to be impetuous, often preferring to 'go for it' with major bets. They typically have their own ideas about investing and are reluctant to engage an adviser, preferring to concentrate their bets. Based on the Bailard, Biehl & Kaiser (BB&K) framework, which investor personality type does this client most closely resemble?

Accepted Answer

Adventurer. The text describes the Adventurer personality as 'confident as well as impetuous,' 'willing to put it all in one major bet and 'go for it',' 'normally have their own ideas about investing,' 'willing to take risks, and they normally do not go for the investment advisers,' and 'prefer concentrating their bets.' These characteristics perfectly match the client described

Question 37

An individual has monthly expenses of ₹60,000. Based on the guidelines for emergency cash reserve mentioned in the text, what would be the minimum recommended amount for their emergency cash reserve?

Accepted Answer

₹120,000. The text states: 'The emergency cash reserve is usually measured at two to three months' spending'. To calculate the minimum recommended amount, we take 2 months' spending.
Minimum emergency cash = 2 months * ₹60,000/month = ₹120,000

Question 38

An individual has monthly expenses of ₹50,000. Their source of income is considered stable. According to the chapter's guidance on emergency cash reserves, what would be the MINIMUM recommended amount for their emergency cash reserve?

Accepted Answer

₹1,00,000. The text states, "The emergency cash reserve is usually measured at two to three months' spending".
Minimum emergency cash = 2 months * Monthly spending = 2 * ₹50,000 = ₹1,00,000

Question 39

As per the Reserve Bank of India’s Liberalised Remittance Scheme (LRS) mentioned in the text, what is the maximum amount an Indian resident individual can invest overseas per financial year?

Accepted Answer

$250,000. The text explicitly states: "an Indian resident individual can only invest up to $250,000 overseas per year."

Question 40

As per the text, what is the usual measure for an emergency cash reserve?

Accepted Answer

Two to three months' spending.. The text specifies, 'The emergency cash reserve is usually measured at two to three months' spending'

Question 41

What is the primary reason for setting exposure limits to specific sectors, entities, and asset classes, as mentioned in the text?

Accepted Answer

To avoid "concentration risk" in the investment portfolio.. The text states, "exposure limits to specific sectors, entities and asset classes can be set to avoid “concentration risk”."

Question 42

An Indian resident individual has a goal to invest overseas. In the current financial year (April-March), they have already remitted $150,000 under the Liberalised Remittance Scheme (LRS). What is the maximum additional amount they can remit overseas in the same financial year as per the LRS limit mentioned in the text?

Accepted Answer

$100,000. The text states that an Indian resident individual can remit up to $250,000 overseas per year under the LRS.
Maximum LRS limit = $250,000
Amount already remitted = $150,000
Additional amount that can be remitted = Maximum LRS limit - Amount already remitted
Additional amount = $250,000 - $150,000 = $100,000

Question 43

According to the Bailard, Biehl & Kaiser (BB&K) framework, which investor personality is characterized by being confident and impetuous, often preferring to concentrate their bets and not typically seeking investment advisors?

Accepted Answer

Adventurer. The text describes Adventurers as 'confident as well as impetuous... They are willing to take risks, and they normally do not go for the investment advisers. They prefer concentrating their bets.'

Question 44

An investor whose primary investment objective is capital appreciation should ideally tilt their asset allocation towards which of the following?

Accepted Answer

High return investments like equity. The text states, 'If the investment objective is capital appreciation, then investments need to be in high return investments (like equity).'

Question 45

An investor has the following financial details:
*   House (estimated market value): ₹1,50,00,000
*   Investments in stocks and bonds: ₹50,00,000
*   Savings account balance: ₹10,00,000
*   Outstanding home loan: ₹75,00,000
*   Car loan outstanding: ₹5,00,000
*   Credit card debt: ₹2,00,000
Based on these figures, what is the investor's net worth?

Accepted Answer

₹1,28,00,000. Net Worth = Total Assets - Total Liabilities
Total Assets = House + Investments + Savings account = ₹1,50,00,000 + ₹50,00,000 + ₹10,00,000 = ₹2,10,00,000
Total Liabilities = Home loan + Car loan + Credit card debt = ₹75,00,000 + ₹5,00,000 + ₹2,00,000 = ₹82,00,000
Net Worth = ₹2,10,00,000 - ₹82,00,000 = ₹1,28,00,000

Question 46

What is the generally recommended measure for an emergency cash reserve for an individual, as per the provided text?

Accepted Answer

Two to three months' spending. The text states: 'The emergency cash reserve is usually measured at two to three months' spending'

Question 47

An investor has the following financial data:
- Value of house: INR 1,50,00,000
- Investments in stocks and mutual funds: INR 50,00,000
- Balance in savings account: INR 10,00,000
- Outstanding home loan: INR 70,00,000
- Credit card debt: INR 2,00,000
What is the investor's net worth according to the method described in the text?

Accepted Answer

INR 1,38,00,000. Net Worth = Total Assets - Total Liabilities
Total Assets = Value of house + Investments in stocks and mutual funds + Balance in savings account
Total Assets = INR 1,50,00,000 + INR 50,00,000 + INR 10,00,000 = INR 2,10,00,000
Total Liabilities = Outstanding home loan + Credit card debt
Total Liabilities = INR 70,00,000 + INR 2,00,000 = INR 72,00,000
Net Worth = INR 2,10,00,000 - INR 72,00,000 = INR 1,38,00,000

Question 48

According to the provided text, what is the typical relationship between risk and return, and liquidity and return, respectively?

Accepted Answer

Positive relationship for risk-return and inverse relationship for liquidity-return.. The text states, 'Higher the risk, higher the return,' indicating a positive relationship between risk and return. It also mentions, 'liquidity has inverse relationship with return,' meaning relatively illiquid investments require a premium

Question 49

As per the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), what is the maximum amount an Indian resident individual can invest overseas per financial year?

Accepted Answer

USD 250,000. The text states: 'an Indian resident individual can only invest up to $250,000 overseas per year.'

Question 50

As per the Reserve Bank of India’s Liberalised Remittance Scheme (LRS) mentioned in the text, what is the maximum amount an Indian resident individual can invest overseas per financial year?

Accepted Answer

USD 250,000. The text explicitly states: 'as per the Reserve Bank of India’s... Liberalised Remittance Scheme (LRS), an Indian resident individual can only invest up to $250,000 overseas per year.'

Ch.14: Introduction to Modern Portfolio Theory

What You Will Learn in This Chapter

Multiple Choice Questions (150)

Case-Based Questions (5 sets)

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