NISM Series X-A: Investment Adviser (Level 1) Mock Test (Set 2)

Public limited companies are required to make the public offer only in dematerialized form if the offer is more than Rs. 10 crore. Dematerialization involves converting physical securities into electronic form, promoting transparency and efficiency in the securities market.

IGMS stands for Integrated Grievance Management System. It is a system that integrates and manages grievances, providing a streamlined approach for addressing and resolving complaints or issues.

The top-down approach in investing begins at the macroeconomic level, analyzing overarching economic factors such as GDP growth, interest rates, and inflation. Based on this analysis, investors then identify sectors and individual stocks that are expected to benefit from these macro trends.

A long put position benefits from a decrease in the price of the underlying asset, indicating a bearish outlook on the market.

SEBI (Securities and Exchange Board of India) has developed a centralized web-based system for lodging and tracking investor complaints known as SCORES (SEBI Complaints Redress System).

Under SEBI (Investment Advisers) Regulations, 2013, individuals or entities providing investment advice for a fee are required to comply with registration requirements. In this case, an Independent Financial Adviser (IFA) who charges advisory fees to investors falls under this category and is expected to comply with the registration requirements.

A Qualified Institutional Buyer (QIB) includes SEBI registered mutual funds, scheduled commercial banks, and SEBI registered Venture capital funds, among others. QIBs are entities that are considered financially sophisticated and are eligible to participate in certain securities offerings with relaxed regulatory requirements.

For a long-term goal like maintaining the current lifestyle post-retirement, a person aged 26 years has a longer investment horizon. In such cases, a larger allocation to equity and equity-oriented mutual fund schemes is often recommended. Equities have the potential for higher returns over the long term, making them suitable for achieving long-term financial goals.

Diversification across companies in an equity portfolio can help minimize non-systematic risk. Non-systematic risk, also known as unsystematic or specific risk, is the risk that is specific to an individual company or industry. By holding a diversified portfolio with investments in different companies or sectors, the impact of adverse events specific to one company can be mitigated, reducing the overall risk of the portfolio.

A stock split is a corporate action that involves dividing the existing shares of a particular face value into smaller denominations. This increases the number of shares outstanding while reducing the face value per share. The goal is to make the stock more affordable for investors and potentially increase liquidity.

An investor wanting to purchase the units of an ETF (Exchange-Traded Fund) will transact with brokers and receive the units in their demat account. ETF transactions are executed through stock exchanges, and investors buy and sell ETF units in the secondary market with the help of brokers. The purchased units are then credited to the investor’s demat account.

The Sharpe and Treynor Ratios are both measures of risk-adjusted return. They assess an investment’s performance relative to its risk by considering factors such as volatility or beta. A higher Sharpe or Treynor Ratio indicates a better risk-adjusted performance, as it takes into account the level of risk associated with achieving a certain level of return.

When expecting a fall in market price, fund managers can reduce the loss in portfolio value by using equity derivatives. Equity derivatives, such as options and futures, provide financial instruments that allow investors to hedge against potential losses or speculate on market movements without directly buying or selling the underlying securities.

This is the right answer because venture capital funds typically provide both equity and debt financing to early-stage companies, supporting their growth in exchange for ownership stakes.

In an options contract, the buyer (holder) has the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset. The seller (writer) of the option, on the other hand, has the obligation to fulfill the terms of the contract if the buyer decides to exercise their right.

A normal yield curve typically shows that long-term interest rates are higher than short-term interest rates. This is a common scenario in a healthy and growing economy, where investors demand higher compensation for the increased risk associated with lending money for a longer period.

When market interest rates increase, existing bonds with lower coupon rates become less attractive. The bond issued at a face value of Rs.100 with a 10% coupon rate may likely trade at a price below face value in the secondary market to align with the higher prevailing interest rates. This allows the bond’s yield to be competitive with newer bonds offering higher coupon rates.

A PUT option gives the buyer the right, but not the obligation, to sell the underlying asset at a predetermined price (strike price) during a predetermined period. It is a type of financial derivative that provides downside protection or profit from a decline in the price of the underlying asset.

Investing in short-term debt funds would be safer if it is expected that interest rates in the market would go up. Short-term debt funds are less sensitive to interest rate movements compared to long-term debt funds, reducing the impact of interest rate risk on the investment.

Dividend, bonus issue, and stock split are all examples of corporate actions. Dividend is a distribution of profits to shareholders, bonus issue involves issuing additional shares to existing shareholders, and stock split increases the number of outstanding shares while decreasing the share price.

The investment adviser is obligated to prioritize the interests of the client when providing advice. This is a fundamental principle in financial advisory services, known as a fiduciary duty. The adviser should act in the best interest of the client, ensuring that recommendations align with the client’s financial goals and well-being.

Category-III Alternative Investment Funds typically employ diverse or complex trading strategies (1) and are allowed to undertake leverage or borrowing (2). These funds are designed for sophisticated investors who are willing to take on higher levels of risk and are familiar with complex investment strategies. Option (c) correctly states that category-III AIFs involve both diverse trading strategies and leverage or borrowing.

Seller of an option is said to be “short the option”. As described above, he/she would have an obligation but no right with regard to selling/buying the underlying asset in the contract. When you are short (i.e., the writer of) an equity option contract:

– Your maximum profit is the premium received.

– You can be assigned an exercised option any time during the life of option contract (in case of American options).

– Your potential loss is theoretically unlimited

Interest rate risk is the risk that the value of an investment will change due to fluctuations in interest rates. This risk is particularly relevant to fixed-income securities, where changes in interest rates can impact the present value of future cash flows. Other risks mentioned (a, c, and d) refer to different types of risks related to foreign exchange, country-specific factors, and political events, respectively.