NISM Series XXI-B: Portfolio Managers Cert. Mock Test (Set 1)

Explanation:

The Coupon yield is the coupon payment as a percentage of the face value.

Coupon yield = Coupon Payment / Face Value

14/100 = 0.14 x 100 = 14%

(Coupon yield is different from Current yield. Current yield = (Annual coupon rate / Current market price of the bond) x 100%

Explanation:

A person who buys a put option is of a bearish view and a person who sells a put option isof bullish or neutral view.

A person who has sold a put option (ie. gone short) receives the premium and will retain thepremium amount as long as the price remains above the strike price. Even if the price is atpar with the strike price, he will gain to the extent of premium received.

Explanation:

Explanation:

Sometimes market based indices may not meet the criteria of a good benchmark, given theportfolio manager’s investment strategies and style. Such situation demands for appropriatecustomized benchmark.

The advantage of such benchmarks is that they meet the requirement of valid benchmarks.The disadvantage is that the costs of construction and maintenance of these benchmarkswould be much higher than the fee paid for using market-based indices.

Explanation:

Explanation:

Explanation:

Explanation:

The agreement between the portfolio manager and the client includes various clauses like –

1. Period of the contract and provision of early termination, if any

2. Procedure of settling client’s account including form of repayment on maturity or early termination of contract etc.

(The other schemes managed by the portfolio manager do not form a part of these clauses)

Explanation:

Explanation:

Perpetual bonds have no maturity date.

Perpetual bonds are fund-raising instruments that do not carry any maturity date as bonds usually do. Instead, they offer to pay their buyers a coupon or interest at a fixed date for perpetuity.

While the principal amount in such bonds is never really due for repayment, issuers do attach a call option. So, at the end of a specific term, say five or 10 years from the issue date, the issuers can buy back the bonds from the investors. Investors can also use the secondary market as a means of exit in the case of traded perpetual bonds.

Explanation:

Buy-side Analysts work for money managers like mutual funds, hedge funds, pension funds or portfolio managers that purchase and sell securities for their own investment accounts.

These analysts generate investment recommendations for their internal consumption viz. use by the fund managers within organization.

Explanation:

The statement is true. Portfolio managers, especially in the context of regulatory and risk management practices, often have restrictions on leveraging the portfolios of their clients for investments in derivatives. Leveraging involves using borrowed funds to increase the size of an investment, and it can amplify both gains and losses. To protect investors and manage risks, regulatory authorities and investment guidelines may impose limitations on leveraging client portfolios, particularly when using derivatives, which can be inherently leveraged instruments. Therefore, it is generally true that portfolio managers should not leverage client portfolios for investments in derivatives.

Explanation:

A customized benchmark is designed to meet the specific requirements and characteristics of a particular investment portfolio. Therefore, the statement that is true with respect to customized benchmarks is that they meet the requirement of valid benchmarks. Customized benchmarks are tailored to reflect the investment strategy, asset allocation, and other unique features of a portfolio, providing a more relevant benchmark for evaluating the performance of the portfolio. The other options (a) Low maintenance costs and (b) Low costs of construction may or may not be true, as the costs associated with maintaining and constructing a customized benchmark can vary depending on the complexity and data requirements of the benchmark.

Explanation:

The term “straight-arrow investors” implies individuals or a group who are conservative and prefer a straightforward or conventional approach to investing. They are typically risk-averse but may be willing to accept a moderate level of risk. Therefore, they are generally exposed to medium risk. Straight-arrow investors typically prioritize capital preservation and may not be as willing to take on high levels of risk associated with more speculative or volatile investments.

Explanation:

All the above are requirements for granting the certificate of registration under Portfolio Managers Regulations.

Explanation:

When an investor buys an option, they pay a premium to the option writer (seller). The premium is the maximum amount the option buyer can lose. The buyer has the right, but not the obligation, to exercise the option. If the option expires worthless or is not exercised, the buyer loses only the premium paid. This limited loss is a defining characteristic of options, making option buying a strategy with a known and controlled risk.

Explanation:

The present value of future cash flows is calculated using a discounting factor, and the interest rate is a crucial component of this factor. As the interest rate increases, the discounting factor also increases. This is because higher interest rates reflect a higher opportunity cost of money and a greater expectation for return on investment. As a result, future cash flows are discounted at a higher rate, leading to a lower present value. Therefore, an increase in the interest rate has a direct impact on the discounting factor used in present value calculations.

Explanation:

• Capital preservation: Focuses on protecting the initial investment and maintaining its value with minimal risk.
• Capital appreciation: Aims for the growth of the investment over time, seeking an increase in its value.
• Current income: Emphasizes generating a steady stream of income from investments, such as dividends or interest.

Explanation:

Correlation measures the strength and direction of relationship between two variables. Correlations among asset class returns can and do change over time and in different economic situations. Asset return correlation in future may also differ from those observed in the past because of changing economic and market regimes

Explanation:

Fund factsheets typically provide information about the fund’s expense ratio, which represents the percentage of the fund’s assets used to cover operating expenses. This ratio includes management fees, administrative costs, and other expenses. The expense ratio is an important metric for investors to consider, as it directly affects the overall return on investment.

The PE ratio (Price-to-Earnings ratio) and Sharpe ratio, on the other hand, are more commonly associated with individual stocks or investment strategies and may not be featured in a standard fund factsheet.

Explanation:

The Sharpe ratio is a measure of risk-adjusted return and is commonly used to evaluate the performance of portfolios, particularly those that are mutually exclusive. It assesses the excess return of a portfolio over the risk-free rate per unit of volatility or risk. The ratio helps investors and analysts understand how well a portfolio’s returns compensate for the risk taken.

Mutually exclusive portfolios refer to portfolios that are distinct and do not overlap. The Sharpe ratio is particularly useful when comparing different portfolios or investment strategies to determine which one provides the best risk-adjusted returns.

Explanation:

Explanation:

The consolidation or mid-to-late-career phase 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 investment portfolio.

At this time, while the time horizon to retirement is still relatively long (15 or 20 years), investors may start looking for capital preservation. High capital gain investments are balanced with some lower-risk assets.

Explanation:

As provided in Regulation 22 (11) of the PMS Regulations, no upfront fees shall be charged by the Portfolio Managers, either directly or indirectly, to the clients.

Explanation:

Explanation:

Whenever a portfolio manager diversifies her investment to different countries, the first thing she considers is how businesses operate in that particular country, what is the risk in investing in that country.
Political and economic stability of a country, the evolved judicial systems which enforces contract in true manner, better liquidity & low transaction costs, good sovereign credit rating etc. will be preferred by international investors.

Explanation:

Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The investors cannot transact with the fund after the NFO is over. At the end of the maturity period, the scheme is wound up, units are cancelled and the money is returned to the investors.
(The fund makes arrangements for providing liquidity, post-NFO through listing of the units on a stock exchange. Such listing is compulsory for close ended schemes to provide liquidity to the investors).

Explanation:

In 1970 Eugene Fama, formalized the efficient markets theory and organized the empirical evidences. Fama presented the efficient market hypothesis in terms of a fair game model stating that in an efficient market, investors can be confident that the current market price fully reflects all available information about a security.
Fama divided the overall efficient market hypothesis (EMH) and the empirical tests of the hypothesis into three sub hypotheses depending on the information set involved: weak-form EMH; semi strong-form EMH and strong-form EMH.

Explanation:

The monthly fact sheet is a concise document with all information related to fund/scheme. Monthly fact sheet is extensively used by investors, fund distributors, fund rating agencies, research analysts, media and others to access information about the various schemes of the mutual fund.
While it is not a regulatory requirement to publish the monthly fact sheet, it is a market practice followed by all the fund houses, on a voluntary basis.

Explanation:

In Efficient Market Hypothesis, it is believed that market price factors all know information and there are no under valued stocks which can be invested to earn a profit ie. Alpha.
Portfolio managers do their research to beat this hypothesis and make profits.

Explanation:

Expected Return from the portfolio = 0.25 x 0.12 + 0.05 x 0.1 x 0.25 x 0.16
= 0.03 + 0.05 + 0.04 = 0.12
= 0.12 x 100 = 12%

Explanation:

Complete diversification means the elimination of all the unsystematic or unique risk (Company or sector specific risk). Once all unsystematic risk is eliminated, only systematic risk is left in the portfolio.

Explanation:

Open ended schemes allow continous sale / purchase of units and investors can enter and exit the scheme at any time. Such scheme do not have any time frame.
Close ended schemes have a time frame which is announced when the scheme is launched.
Interval funds combine features of both open-ended and close-ended schemes. They are largely close-ended but become open-ended at pre-specified intervals.

Explanation:

The factor of Value can be measured by : Price to Earnings ratio , Price to Book Ratio , Price to Sales Ratio , Dividend Yield etc.

Explanation:

In a Callable bond, the issuer ie. who has issued the secutities/bonds has the right to prepay the bond on specified dates before maturity.
This generally happens when interest rates fall in the economy. The issuer will prepay the money to investors and than can issue new bonds at a lower interest rate and thus save on interest costs.

Explanation:

Securities with maturities greater than one year are generally referred to as capital market securities. The capital market is a segment of the financial market where long-term financial instruments such as stocks, bonds, and other securities are bought and sold. These securities represent ownership in companies (stocks) or debt obligations (bonds) that have a maturity exceeding one year. The capital market provides a platform for businesses and governments to raise long-term capital for various projects and activities.

Explanation:

Companies issuing equity shares can be classified on the basis of size—measured by way of their market capitalization as ultra large cap, large cap, mid-cap, small cap, micro-cap etc.

Explanation:

Development of 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 decision are based on IPS considering investors’ goal and objectives, risk appetite etc.

Explanation:

A Mutual Fund is a trust that pools the savings of a number of investors who have a common financial goal. Investors contribute their money to the mutual fund, and professional fund managers invest the pooled funds into a diversified portfolio of stocks, bonds, or other securities. The returns generated from these investments are then distributed among the investors based on their proportional holdings in the mutual fund. Mutual funds provide a way for individual investors to access diversified and professionally managed investment portfolios.

Explanation:

Portfolio Management Services (PMS) providers are required to disclose audit observations to their clients. According to regulations, PMS providers must disclose the audit observations of the preceding three years to their clients. This transparency helps investors in making informed decisions about their investments and ensures that they are aware of any relevant audit findings that may impact the management of their portfolios.

Explanation:

Explanation:

The Global Investment Performance Standards (GIPS) provide the investment community with a set of ethical standards for investment management firms to follow when presenting their performance results to potential clients.

Explanation:

The gains arising from the transfer of securities held in the investee company can be classified based on both capital asset and trading asset. This means that the gains can be categorized either as capital gains or trading gains, depending on the nature of the holding and the intent behind the investment. If the securities are held as part of long-term investment, they are treated as capital assets, and gains or losses from their transfer are considered capital gains. On the other hand, if the securities are held for short-term trading purposes, the gains or losses are treated as trading gains or losses. This dual classification allows for different tax treatment based on the holding period and purpose of the investment.

Explanation:

The SEBI (Securities and Exchange Board of India) Fraudulent and Unfair Trade Practices Regulations prohibit a person from directly or indirectly dealing in securities in a fraudulent manner. This means that individuals or entities are not allowed to engage in deceptive or unfair practices related to buying, selling, or dealing in securities within the financial markets. The regulations aim to ensure the integrity and fairness of the securities market by preventing fraudulent activities.

Explanation:

A non-discretionary portfolio manager manages the funds in accordance with the specific directions and preferences of the client. In this arrangement, the client provides explicit instructions, and the portfolio manager executes investment decisions based on those instructions. The portfolio manager does not have the discretion to make independent investment decisions but follows the client’s guidelines and preferences. This is in contrast to discretionary portfolio management, where the portfolio manager has the authority to make investment decisions on behalf of the client without needing explicit approval for each transaction.

Explanation:

The feature that allows the issuing firm to retire the bonds before their maturity by paying a prescribed price is known as “callability,” and it involves the use of a call option. When a bond is callable, the issuer has the right to redeem or “call” the bond before its scheduled maturity date. The issuer typically pays a specified call price to retire the bonds early. This feature provides flexibility for the issuer to manage its debt obligations in response to changing market conditions or interest rate environments.

Explanation:

The Treynor ratio uses Beta as the measure of risk. The Treynor ratio is a risk-adjusted performance measure that evaluates the return of an investment portfolio in relation to its systematic risk, as measured by Beta. Beta represents the sensitivity of a portfolio’s returns to movements in the overall market. A higher Beta indicates higher systematic risk.

Explanation:

The Code of conduct for the portfolio manager is specified in the Schedule III of the SEBI PMS Regulation.

Clause 12 (A) and 12(B) state that –

12. (A) A portfolio manager or any of its employees shall not render, directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or non-real time, unless a disclosure of his long or short position in the said security has been made, while rendering such advice.

(B) In case an employee of the portfolio manager is rendering such advice, he shall also disclose the interest of his dependent family members and the employer including their long or short position in the said security, while rendering such advice

Explanation:

Investing in debt funds carries various types of risk. These risks include Credit risk (Default Risk), Interest rate risk, Inflation risk, reinvestment risk etc.

Credit Risk (Default Risk): The chances that a borrower might not repay the interest or principle on the committed date is considered as credit risk or default risk.

Interest rate risk : Market price of the bond and interest rates carry opposite relationship. Whenever interest rates in the market go up, the market prices of bond come down.

Explanation:

Non-market risks, which are not due to overall market movements but arise from the unique characteristics of the investee company, can be referred to by different terms. All the options (a) idiosyncratic risk, (b) specific risk, and (c) unsystematic risk are used interchangeably to describe this type of risk.

These risks are specific to individual companies and can include factors such as management decisions, competitive pressures, regulatory changes, and other company-specific events that may impact the performance of the investment. Investors can diversify their portfolios to mitigate the impact of idiosyncratic or unsystematic risks by holding a variety of investments that are not closely correlated with each other.