📊 NISM Series XVChapter 12 of 15⚖ 7 marks weightageCase-Based ✓
Ch.12: Fundamentals of Risk and Return
Practice questions for NISM-Series-XV: Research Analyst Certification Examination
(mandated by SEBI under the Research Analysts Regulations, 2014).
Chapter 12 carries 7 out of 100 marks
in the final examination. The exam has 80 MCQs + 5 case-based sets, 120-minute duration,
60% passing score, and −0.25 negative marking per wrong answer.
35
MCQ
2
Case Sets
43
Total Qs
7
Exam Marks
60%
Pass Score
−0.25
Neg. Marking
What You Will Learn in This Chapter
Calculate holding period returns, CAGR and risk-adjusted returns
Understand systematic vs unsystematic risk, beta, and Sharpe ratio
Apply Modern Portfolio Theory and CAPM in research context
What is the relationship between bond prices and interest rates, as described in the text?
AThey have a direct (positive) relationship.
✓They have an inverse (negative) relationship.
CThey are unrelated to each other.
DBond prices only rise when interest rates rise.
💡 The text explicitly states, 'Bond prices and interest rates have an inverse relationship.'
Q2MCQMediumReturns
An investor earned a simple return of 23% over an investment period of 15 months. Based on the method described in the text, what would be the simple annualized return for this investment?
✓18.4%
B23.0%
C27.6%
D15.3%
💡 The simple annualized return is calculated as (Holding Period Return / Number of Months Held) x 12. So, (23% / 15) x 12 = 18.4%. This calculation is provided in the text as an example.
Q3MCQMediumReturns
Which of the following statements about Compounded Annual Growth Rate (CAGR) is FALSE, according to the text?
ACAGR calculations assume that periodic returns are re-invested.
BCAGR is the smoothened average annual rate of return.
CCAGR does not represent the actual rate at which the investment grew each year.
✓CAGR is the accepted standard measure of return for periods less than one year.
💡 The text states: 'CAGR is the accepted standard measure of return on investment in financial markets, except in case of returns that involve periods of less than one year.'
Q4MCQEasyMarket Risk
Which type of investment is NOT subject to market risk, according to the text?
AEquity shares.
BBonds.
CGold.
✓Deposits or small savings schemes.
💡 The text states, 'Investments such as deposits or small savings schemes are not marketable securities, and the investor gets a pre-defined amount on maturity. They have no market risk.'
Q5MCQEasyForms of Return
Which of the following is NOT explicitly mentioned as a form of return from an investment in the provided text?
AInterest
BDividends
CRent
✓Tax benefits
💡 The text explicitly mentions interest, dividends, and rent as forms of periodic payouts, and appreciation in value. Tax benefits are not mentioned as a form of return.
Q6MCQMediumBusiness Risk
All of the following are mentioned as manifestations of business risk EXCEPT:
ACommodity risk.
BOperations risk.
CSupply Chain risk.
✓Credit risk.
💡 The text lists 'Commodity risk (fluctuations in cost of raw materials), Operations risk (Unexpected changes in employee costs due to attrition and retraining), Competition Risk, (due to introduction and position of competing products), Supply Chain Risks (arising due to marketing and distribution related aspects), Currency Risk (due to fluctuation of exchange rates in business entities engaged in International Business)' as manifestations of business risk. Credit risk is identified as a separate category of risk.
Q7MCQMediumInterest Rate Risk
If the Reserve Bank of India cuts policy interest rates, what is the likely immediate effect on existing bond prices, according to the text?
AExisting bond prices will fall.
✓Existing bond prices will rise.
CExisting bond prices will remain unchanged.
DThe effect on bond prices is unpredictable.
💡 The text explicitly states: 'If interest rates fall, or are expected to fall, bond prices go up.'
Q8MCQEasyRisks in Investments
What is primarily defined as risk in an investment according to the provided text?
AThe certainty of receiving expected returns.
✓The volatility and uncertainty in the returns, and in extreme cases, the loss of capital invested.
CThe guaranteed appreciation in the value of the investment.
DThe fixed periodic payouts received from an investment.
💡 The text states, 'Risk in an investment is the volatility and uncertainty in the returns and in the extreme case, the loss of capital invested.'
Q9MCQHardCompounded Annual Growth Rate (CAGR)
An investor bought an investment for Rs. 5000 and sold it after 3 years for Rs. 6500, having received no intermediate cash flows. Which formula correctly represents the calculation for the Compounded Annual Growth Rate (CAGR) for this investment?
A( (6500 - 5000) / 5000 ) x 100
✓( (6500 / 5000) ^ (1/3) ) - 1
C( (6500 / 5000) / 3 ) - 1
D( (6500 / 5000) - 1 ) x 3
💡 The text provides the CAGR formula as: '{(End Value/Beginning Value) ^(1/n)}-1, where n is the holding period in years.' In this case, End Value = 6500, Beginning Value = 5000, and n = 3 years.
Q10MCQHardInflation Risk
Why is inflation risk considered highest in fixed return instruments like bonds and fixed deposits?
ABecause their interest payments and principal repayments are adjusted for inflation.
✓Because the real value of the investment can be eroded even without default risk.
CBecause they offer variable interest rates that fluctuate with inflation.
DBecause they are subject to higher market risk than equities during inflationary periods.
💡 The text explains, 'Inflation risk is highest in fixed return instruments... Both interest payments and principal repayments are amounts fixed in absolute terms... Thus, even if there is no risk of default on payment of interest or return of principal, the real value of the investment has been eroded because of inflation.'
Q11MCQMediumInflation Risk
In which type of investment is inflation risk (or purchasing power risk) typically highest?
AEquity shares
BGold and other commodities
✓Fixed return instruments like bonds and fixed deposits
DReal estate
💡 The text states, 'Inflation risk is highest in fixed return instruments, such as bonds, fixed deposits and debentures, where investors are paid a fixed periodic interest and returned the principal amount at maturity.'
Q12MCQEasyDefinition of Risk
According to the text, which of the following best defines 'risk' in an investment?
AThe guaranteed loss of capital invested.
✓The difference between expected and actual returns, along with volatility and uncertainty.
CThe potential for only negative returns.
DThe rate at which an investment grows over time.
💡 The text states, 'Risk in an investment is the volatility and uncertainty in the returns and in the extreme case, the loss of capital invested. An investment is also deemed to be risky if the actual returns earned are different from the expected returns.'
Q13MCQEasyFundamentals of Return
Which of the following is NOT explicitly mentioned as a form of return from an investment in the provided text?
APeriodic payouts such as interest.
BAppreciation in the value of the investments.
CPeriodic payouts such as dividends.
✓Tax benefits from investment.
💡 The text mentions 'periodic payouts such as interest, dividends and rent, or in the form of appreciation in the value of the investments.' Tax benefits are not listed as a form of return.
Q14MCQMediumRisks
Why are fixed return instruments, such as bonds and fixed deposits, considered to have the highest inflation risk?
ABecause their market prices are highly volatile.
✓Because the interest payments and principal repayments are fixed in nominal terms, leading to a decline in their real value if inflation rises.
CBecause they are more susceptible to credit risk than other investment types.
DBecause they offer variable returns that do not keep pace with inflation.
💡 The text states that inflation risk is highest in fixed return instruments because 'Both interest payments and principal repayments are amounts fixed in absolute terms,' meaning their real value erodes with inflation.
Q15MCQHardReturns
An investor purchased 150 shares of company ABC at Rs. 25 per share, paying a Rs. 20 commission. Based on the example provided in the text, what was the total cost incurred for this investment?
ARs. 3,750
✓Rs. 3,770
CRs. 4,480
DRs. 4,630
💡 The text provides the exact calculation: 'Total Cost = shares x price per share + commission fee = 150 x Rs.25 + Rs.20 = Rs.3, 770'.
Q16MCQMediumCompounded Annual Growth Rate (CAGR)
What is a key characteristic of the Compounded Annual Growth Rate (CAGR) as described in the text?
AIt represents the actual rate at which the investment grew each year of the investment period.
BIt does not consider the compounding effect of the return generation process.
✓It is a smoothened average annual rate, assuming periodic returns are re-invested.
DIt is primarily used for investment periods of less than one year.
💡 The text states, 'CAGR calculations assume that the periodic returns received from an investment are re-invested to earn returns...' and 'CAGR is the smoothened rate of return at which the return grew to the final value over the investment period. The actual return in each year of the holding period may be different from the CAGR.' It is explicitly stated that CAGR is not used for periods less than one year.
Q17MCQHardRisks
Which specific type of risk is explicitly mentioned in the text as being efficiently diversified by holding a diversified portfolio of various businesses?
AInflation Risk
BInterest Rate Risk
✓Business Risk
DCredit Risk
💡 Under the 'Business Risk' section, the text states: 'Holding a diversified portfolio various business is an efficient way to diversify this risk.'
Q18MCQEasyReturns
Which of the following components are considered part of the total returns from an investment, according to the text?
AOnly periodic payouts such as interest or dividends.
BOnly the appreciation in the value of the investment.
✓Both periodic payouts and the appreciation (or depreciation) in the value of the investment.
DOnly the initial capital invested.
💡 The text explicitly states that returns can be in the form of periodic payouts (interest, dividends, rent) or appreciation in value, and together they form the total returns.
Q19MCQEasyComponents of Return
According to the text, which of the following forms part of the total returns from an investment?
AOnly periodic payouts like interest and dividends.
BOnly appreciation in the value of the investment.
✓Both periodic payouts and appreciation in the value of the investment.
DOnly the original cost of the investment.
💡 The text states, 'The returns from an investment can be in the form of periodic payouts such as interest, dividends and rent, or in the form of appreciation in the value of the investments. ... Together, they form the total returns from the investment.'
Q20MCQMediumMarket Risk
Which types of investments are generally NOT subject to market risk, according to the text?
AEquity shares
BBonds and gold
CReal estate
✓Deposits or small savings schemes
💡 The text states, 'Investments such as deposits or small savings schemes are not marketable securities, and the investor gets a pre-defined amount on maturity. They have no market risk...'
Q21MCQMediumHolding Period vs. Annualized Return
Why is it difficult to compare investments held for different periods using only holding period return?
AHolding period return does not account for the total cost of investment.
✓Holding period return does not consider the time duration over which the return was earned.
CHolding period return is always lower than annualized return.
DHolding period return includes unrealized gains, making comparisons inaccurate.
💡 The text states, 'Return that does not take the investment horizon into consideration makes it difficult to compare between investments that have been held for different periods.'
Q22MCQHardBusiness Risk Components
Which of the following is NOT listed as a manifestation of business risk in the provided text?
ACommodity risk
BOperations risk
✓Market risk
DSupply Chain Risks
💡 The text lists Commodity risk, Operations risk, Competition Risk, Supply Chain Risks, and Currency Risk as manifestations of business risk. Market risk is discussed as a separate category of risk.
Q23MCQHardInflation Risk
Based on the provided text, which type of investment is typically most susceptible to inflation risk, and why?
AEquity shares, because their prices fluctuate significantly with inflation.
✓Fixed return instruments like bonds, because their fixed payments lose purchasing power.
CCommodities like gold, because their value is tied to global economic conditions.
DReal estate, because its value appreciates faster than inflation.
💡 The text states, 'Inflation risk is highest in fixed return instruments, such as bonds, fixed deposits and debentures, where investors are paid a fixed periodic interest and returned the principal amount at maturity. Both interest payments and principal repayments are amounts fixed in absolute terms.'
Q24MCQEasyRisks
According to the text, what is the relationship between bond prices and interest rates?
AThey have a direct relationship.
✓They have an inverse relationship.
CThey are unrelated.
DThey move in tandem only during periods of high inflation.
💡 The text clearly states: 'Bond prices and interest rates have an inverse relationship.'
Q25MCQMediumAnnualized Returns
Why is the simple annualized return calculation often not an appropriate estimation of interest earned compared to Compounded Annual Growth Rate (CAGR)?
AIt does not consider the initial investment amount.
✓It does not account for the compounding effect of return generation.
CIt only applies to investments held for less than one year.
DIt includes commission fees, which distorts the true return.
💡 The text states, 'The above annualized return calculation would not be an appropriate estimation of interest earned, because it does not consider the compounding effect of the return generation process of financial investment.'
Q26MCQMediumCompounded Annual Growth Rate (CAGR)
What key financial concept does the Compounded Annual Growth Rate (CAGR) method incorporate that simple annualized return does not?
ATotal returns and total cost of investment
BThe impact of inflation on returns
✓The compounding effect of return generation and time value of money
DThe volatility of actual annual returns
💡 The text mentions that CAGR takes into consideration 'the compounding effect of the return generation process of financial investment' and 'Time value of money'.
Q27MCQMediumInterest Rate Risk
According to the text, what is the relationship between bond prices and interest rates?
AThey have a direct relationship; both rise and fall together.
✓They have an inverse relationship; as interest rates rise, bond prices fall.
CThey are unrelated; bond prices are only affected by credit ratings.
DBond prices only fall when interest rates decline.
💡 The text explicitly states, 'Bond prices and interest rates have an inverse relationship.' It further elaborates that if interest rates rise, bond prices decline.
Q28MCQMediumRisks
How does an increase in interest rates generally affect equity markets, according to the text?
AIt typically leads to increased borrowing, higher capex, and improved profits for companies.
BIt reduces the cost of capital, thereby increasing the present value of future cash flows.
✓It increases the cost of borrowing for companies, which can reduce profits and cash flows to equity investors, pushing prices down.
DIt has no discernible impact on equity prices, as equities are independent of interest rate movements.
💡 The text explains that when interest rates go up, the cost of borrowing increases, leading to lesser capex and declining profits. This reduces cash flows to equity investors, which in turn reduces demand for equity and pushes prices down.
Q29MCQEasyReturns
What is one of the primary purposes of calculating returns from an investment, as stated in the text?
ATo determine the tax implications of the investment.
✓To help investors compare different investments on the basis of returns.
CTo forecast the future market value of an asset.
DTo calculate the broker's commission fees.
💡 The text states that calculating returns helps investors 'compare different investments on the basis of returns' and 'evaluate the performance of an investment relative to benchmark'.
Q30MCQEasyROI Calculation
How is Return on Investment (RoI) calculated over a particular period, according to the text?
A(Total Returns - Total Cost) / Total Cost x 100
✓(Total Returns / Total Cost) x 100
C(Total Cost / Total Returns) x 100
D(Total Returns + Total Cost) / Total Cost x 100
💡 The text states, 'The RoI calculated as (Total Returns/Total Cost) x 100, is the return earned over a particular period.'
Q31MCQHardCAGR for Multiple Cash Flows
For calculating the CAGR of an investment involving multiple intermediate cash inflows and final sale proceeds, what method is specifically recommended by the text?
AThe direct CAGR formula: {(End Value/Beginning Value) ^(1/n)}-1
BSimple annualized return formula: (Holding Period Return / Months Held) x 12
✓Using the XIRR function in Excel.
DCalculating the average of annual simple returns.
💡 The text states, 'This problem cannot be solved using the direct CAGR formula. The underlying CAGR for these multiple flows has to be calculated by using XIRR function in Excel.'
Q32MCQEasyRisks
What is another name for Inflation Risk, as mentioned in the provided text?
ADefault Risk
✓Purchasing Power Risk
CLiquidity Risk
DMarket Volatility Risk
💡 The text states: 'Inflation risk is also known as purchasing power risk.'
Q33MCQMediumRisks in Investments
According to the text, why is it important for an investor to identify the type of risk in an investment?
ATo ensure the investment always generates the highest possible return.
BTo avoid all forms of risk entirely.
✓To decide whether the investment is suitable for their situation.
DTo only invest in instruments with no market risk.
💡 The text states, 'It is important for an investor to be able to identify the type of risk in an investment to be able to decide whether it is suitable to their situation.'
Q34MCQEasyInflation Risk
Inflation risk is also known by which other term, as mentioned in the text?
AMarket risk.
✓Purchasing power risk.
CBusiness risk.
DCredit risk.
💡 The text explicitly states, 'Inflation risk is also known as purchasing power risk.'
Q35MCQEasyRisk in Investments
What is considered 'risk' in an investment, according to the provided text?
AThe guaranteed return an investment will generate.
✓The volatility and uncertainty in the returns, and the potential loss of capital.
CThe fixed interest rate offered on bank deposits.
DThe ability to compare different investments based on returns.
💡 The text defines risk as 'the volatility and uncertainty in the returns and in the extreme case, the loss of capital invested.'
Case-Based Questions (2 sets)
Case 1Case-BasedInvestment Risks
Ms. Kavita, a 65-year-old retired individual, is meticulously evaluating her investment portfolio to ensure it aligns with her financial goals and conservative risk profile. A substantial portion of her life savings is currently allocated to bank fixed deposits, which reliably generate a steady income of Rs. 40,000 per month, crucial for her living expenses. Additionally, her portfolio includes government bonds, offering a fixed coupon rate and perceived safety. Recently, influenced by peers, she has contemplated diversifying into equity mutual funds, seeking potentially higher growth. However, her primary concerns revolve around the erosion of her purchasing power, the stability of her income streams, and the potential for capital loss, making her quite risk-averse. Current economic forecasts predict a notable increase in inflation over the next year, coupled with anticipated interest rate hikes by the central bank aimed at stabilizing the economy. Her financial advisor has been explaining various risks inherent in different asset classes, stressing the necessity of choosing investments that match her specific risk tolerance and income requirements.
Easy Sub-question 1
Given the anticipated increase in inflation, which specific risk, as described in the text, is most pertinent to Ms. Kavita's fixed deposits and government bonds?
AInterest Rate Risk
BBusiness Risk
✓Inflation Risk
DMarket Risk
💡 Inflation risk (or purchasing power risk) is the risk that money received on an investment may be worth less when adjusted for inflation. It is highest in fixed return instruments like fixed deposits and bonds, as their fixed payments lose purchasing power.
Medium Sub-question 2
If the central bank indeed raises interest rates to curb inflation, how would this action primarily impact the market value of Ms. Kavita's existing government bonds?
AThe market value would increase.
✓The market value would decrease.
CThe market value would remain unchanged.
DThe impact would depend on the bond's maturity period.
💡 Interest rate risk states that bond prices and interest rates have an inverse relationship. If interest rates rise, new bonds offer higher yields, making existing lower-yielding bonds less attractive, thus pushing their market prices down.
Hard Sub-question 3
Considering the economic outlook and Ms. Kavita's conservative profile, what is the most significant risk to her fixed deposit income and capital, as described in the text?
AInterest Rate Risk, causing the value of her fixed deposits to fall if market rates increase.
BBusiness Risk, as the bank's profitability might decline, affecting her interest payments.
✓Inflation Risk, which will reduce the purchasing power of her fixed monthly income.
DMarket Risk, as fixed deposits are traded in secondary markets and their prices fluctuate.
💡 The text explicitly states that fixed deposits have 'no market risk' and are not marketable securities, so options A and D are incorrect regarding market value fluctuations. Business risk for the bank is related to credit risk, which is generally low for FDs in reputable banks. The most significant risk highlighted for fixed deposits in the context of rising inflation is Inflation Risk, which erodes the purchasing power of the fixed income, even if the nominal principal and interest are secure.
Medium Sub-question 4
Ms. Kavita is considering investing in a diversified equity mutual fund. According to the text, which of the following risks is least likely to be significantly reduced or diversified away by such an investment?
ABusiness Risk
BOperations Risk
✓Market Risk
DCompetition Risk
💡 Business Risk (which includes operations risk, competition risk, commodity risk, etc.) can be diversified by holding a portfolio across various businesses. However, Market Risk refers to the risk of loss due to adverse price movements in the overall market and affects all investments with an active secondary market, thus it cannot be diversified away.
Case 2Case-BasedInvestment Returns Calculation
An investor, Mr. Sharma, initiated an investment in TechGrow Ltd., a rapidly expanding IT firm listed on the NSE, on January 1, 2020. He purchased 200 shares at an initial price of Rs. 120 per share, incurring a total brokerage fee of Rs. 50 for the acquisition. Over his investment horizon, TechGrow Ltd. demonstrated consistent performance, distributing dividends. Specifically, Mr. Sharma received a dividend of Rs. 2 per share on December 31, 2020, and another dividend of Rs. 3 per share on December 31, 2021. These dividends were not reinvested but were consumed. After carefully monitoring market trends and achieving his financial objectives, Mr. Sharma decided to liquidate his entire holding on December 31, 2022, selling all 200 shares at a market price of Rs. 150 per share. The selling transaction involved a brokerage fee of Rs. 75. Mr. Sharma held this investment for exactly three years, aiming for long-term capital appreciation and income generation, and is now evaluating the overall profitability of his venture.
Medium Sub-question 1
Calculate the total returns (in Rupees) Mr. Sharma received from his investment, including dividends and net sales proceeds.
Ignoring the precise timing of dividend receipts for simplicity as per the text's CAGR example, what is the Compounded Annual Growth Rate (CAGR) for Mr. Sharma's investment?
A7.92%
✓8.74%
C9.50%
D10.15%
💡 CAGR = ((End Value / Beginning Value)^(1/n)) - 1. Here, End Value (Total Returns) = Rs. 30,925, Beginning Value (Total Cost) = Rs. 24,050, and n (holding period) = 3 years. CAGR = ((30925 / 24050)^(1/3)) - 1 = (1.28586)^(0.3333) - 1 = 1.0874 - 1 = 0.0874 or 8.74%.
Medium Sub-question 4
What is the holding period return (HPR) for Mr. Sharma's investment?
A24.50%
✓28.59%
C31.00%
D33.33%
💡 Holding Period Return = (Total Returns / Total Cost) - 1 = (Rs. 30,925 / Rs. 24,050) - 1 = 1.28586 - 1 = 0.28586 or 28.59%.
About this content: These practice questions are based on the
NISM-Series-XV: Research Analyst Certification Examination Workbook (February 2026)
published by the National Institute of Securities Markets (NISM), Mumbai.
NISM is a SEBI-established institution. Questions cover Fundamentals of Risk and Return with verified answers and explanations.
BullWiser is an independent exam preparation platform — not affiliated with NISM or SEBI.
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