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Series X-B · Practice Set 1

NISM Series X-B: Investment Adviser Level 2 Certification — Practice Set 1 Practice Questions

Original practice set for NISM Series X-B: Investment Adviser Level 2 Certification. Every question below shows the correct answer and a full explanation, so you can read through this set as a study page or attempt it as a timed mock test.

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Practice questions

All 35 questions in Practice Set 1

Read each question, think through your answer, then expand it to check the correct option and explanation.

Portfolio Management

Q1. Modern Portfolio Theory (MPT) by Harry Markowitz states that:

  1. A. Highest return always comes from highest risk
  2. B. Investors can optimise return for a given level of risk through diversification — creating an efficient frontier of portfolios
  3. C. All stocks have the same risk
  4. D. Diversification increases risk
Show correct answer & explanation

Correct answer: B. Investors can optimise return for a given level of risk through diversification — creating an efficient frontier of portfolios

MPT shows that by combining assets with low correlations, investors can construct portfolios that offer the maximum expected return for a given level of risk. The efficient frontier represents all such optimal portfolios.
Portfolio Management

Q2. The Capital Asset Pricing Model (CAPM) relates an asset's expected return to:

  1. A. Its dividend history
  2. B. Its systematic risk (beta) relative to the market: E(R) = Rf + β(Rm - Rf)
  3. C. Its P/E ratio only
  4. D. Its face value
Show correct answer & explanation

Correct answer: B. Its systematic risk (beta) relative to the market: E(R) = Rf + β(Rm - Rf)

CAPM: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). Beta measures systematic (market) risk. CAPM implies higher beta = higher expected return, and all unsystematic risk can be diversified away.
Portfolio Management

Q3. Systematic risk (market risk) is:

  1. A. Diversifiable through portfolio construction
  2. B. Non-diversifiable risk affecting all assets — economic recessions, interest rate changes, geopolitical events
  3. C. Risk specific to a single company
  4. D. Risk from poor management decisions
Show correct answer & explanation

Correct answer: B. Non-diversifiable risk affecting all assets — economic recessions, interest rate changes, geopolitical events

Systematic risk affects all securities and cannot be eliminated through diversification. It includes macro factors like economic cycles, inflation, interest rate changes, and geopolitical events. Beta measures this risk relative to the market.
Portfolio Management

Q4. Unsystematic risk (idiosyncratic risk) is:

  1. A. Non-diversifiable market risk
  2. B. Company or sector-specific risk that can be eliminated through diversification — e.g., management quality, product failure
  3. C. Risk from the broader economy
  4. D. Risk from interest rate changes
Show correct answer & explanation

Correct answer: B. Company or sector-specific risk that can be eliminated through diversification — e.g., management quality, product failure

Unsystematic risk is unique to a company or sector and can be substantially eliminated through portfolio diversification. Examples include management changes, product recalls, labour strikes, and regulatory issues specific to one company.
Portfolio Management

Q5. Strategic Asset Allocation (SAA) differs from Tactical Asset Allocation (TAA) in that:

  1. A. SAA changes allocation daily based on markets while TAA is fixed
  2. B. SAA is a long-term target allocation aligned to goals and risk profile; TAA is short-term deviation from SAA to exploit market opportunities
  3. C. SAA only uses equity; TAA uses all assets
  4. D. They are the same concept
Show correct answer & explanation

Correct answer: B. SAA is a long-term target allocation aligned to goals and risk profile; TAA is short-term deviation from SAA to exploit market opportunities

SAA sets the long-term target allocation (e.g., 60:40 equity:debt) based on client goals and risk profile. TAA allows temporary, short-term deviations from SAA to capitalise on market opportunities or manage risks, before reverting to SAA.
Portfolio Management

Q6. Portfolio rebalancing is done to:

  1. A. Chase the best performing assets
  2. B. Restore the portfolio to original target asset allocation after market movements have shifted weights
  3. C. Increase equity allocation always
  4. D. Reduce all risks to zero
Show correct answer & explanation

Correct answer: B. Restore the portfolio to original target asset allocation after market movements have shifted weights

Rebalancing restores the portfolio to its original target allocation. If equity outperforms and grows from 60% to 70%, selling some equity and buying debt restores the 60:40 balance. It enforces discipline — selling high and buying low.
Behavioural Finance

Q7. Loss aversion in behavioural finance means:

  1. A. Investors prefer avoiding losses to acquiring equivalent gains — pain of a Rs. 1,000 loss > pleasure of Rs. 1,000 gain
  2. B. Investors are indifferent to gains and losses
  3. C. Investors prefer higher risk for higher gains
  4. D. Investors always make rational decisions
Show correct answer & explanation

Correct answer: A. Investors prefer avoiding losses to acquiring equivalent gains — pain of a Rs. 1,000 loss > pleasure of Rs. 1,000 gain

Loss aversion (Kahneman & Tversky) is the finding that losses feel psychologically more painful than equivalent gains feel pleasurable — by approximately 2:1 ratio. This leads investors to hold losing positions too long and sell winners too early.
Behavioural Finance

Q8. Anchoring bias in investing refers to:

  1. A. Using market indices as portfolio benchmarks
  2. B. Over-relying on the first piece of information encountered (the anchor) when making decisions — e.g., fixating on a stock's purchase price
  3. C. Investing only in fixed income
  4. D. Avoiding risk always
Show correct answer & explanation

Correct answer: B. Over-relying on the first piece of information encountered (the anchor) when making decisions — e.g., fixating on a stock's purchase price

Anchoring bias occurs when investors give disproportionate weight to an initial piece of information (the 'anchor') when making subsequent decisions. Example: refusing to sell a stock below its purchase price even when fundamentals have deteriorated.
Behavioural Finance

Q9. Herding behaviour in financial markets occurs when:

  1. A. Investors are contrarian
  2. B. Investors follow the crowd and make investment decisions based on what others are doing rather than their own analysis
  3. C. Only institutional investors buy the same stocks
  4. D. Markets are efficient
Show correct answer & explanation

Correct answer: B. Investors follow the crowd and make investment decisions based on what others are doing rather than their own analysis

Herding occurs when investors follow the crowd rather than independent analysis — buying because others are buying (creating bubbles) or selling because others are selling (causing crashes). It is a significant driver of market volatility.
Behavioural Finance

Q10. Overconfidence bias in investors leads to:

  1. A. Excessive diversification
  2. B. Excessive trading, under-diversification, and underestimation of risk — investors overestimate their ability to pick stocks or time markets
  3. C. Conservative investing
  4. D. Better risk management
Show correct answer & explanation

Correct answer: B. Excessive trading, under-diversification, and underestimation of risk — investors overestimate their ability to pick stocks or time markets

Overconfident investors overestimate their ability to predict markets, leading to excessive trading (higher costs, lower returns), concentrated portfolios, and taking on more risk than appropriate. Studies show overconfident traders underperform the market.
Estate Planning

Q11. A Will (Testament) in estate planning is:

  1. A. A legal document that only covers immovable property
  2. B. A legal document specifying how a person's assets should be distributed after death — valid only after the testator's death
  3. C. A document for gifting assets during lifetime
  4. D. A government-issued inheritance certificate
Show correct answer & explanation

Correct answer: B. A legal document specifying how a person's assets should be distributed after death — valid only after the testator's death

A Will (or Last Will and Testament) is a legal document specifying the testator's wishes for distributing their assets after death. It is effective only upon death, and can be changed anytime during the person's lifetime.
Estate Planning

Q12. Succession planning importance lies in:

  1. A. Tax avoidance strategies
  2. B. Ensuring smooth, orderly transfer of wealth and assets to intended beneficiaries, minimising disputes and legal complications after death
  3. C. Only for high net worth individuals
  4. D. Only for business succession
Show correct answer & explanation

Correct answer: B. Ensuring smooth, orderly transfer of wealth and assets to intended beneficiaries, minimising disputes and legal complications after death

Succession planning ensures assets pass smoothly to intended heirs with minimal disputes, delays, and costs. Without proper planning (Will, nominations, joint holdings), estate settlement can be lengthy, costly, and contentious for families.
Estate Planning

Q13. Nomination in financial accounts (bank, Demat, insurance) differs from a Will in that:

  1. A. Nomination overrides the Will in all cases
  2. B. Nomination is a convenience facility for receiving assets — the nominee holds assets as a trustee for legal heirs, while a Will determines final ownership
  3. C. Nomination and Will are the same thing
  4. D. A Will overrides nomination only for real estate
Show correct answer & explanation

Correct answer: B. Nomination is a convenience facility for receiving assets — the nominee holds assets as a trustee for legal heirs, while a Will determines final ownership

Nominees in financial accounts are 'trustees' who receive assets on behalf of legal heirs — they do not automatically become the owners. The Will determines final distribution. For mutual funds and insurance, nominations play a stronger role in direct transfer.
Advanced Financial Planning

Q14. Tax-loss harvesting in portfolio management means:

  1. A. Avoiding all taxable investments
  2. B. Selling loss-making investments to realise capital losses that offset capital gains elsewhere in the portfolio — reducing net tax liability
  3. C. Selling profitable investments first
  4. D. Holding all investments for over 3 years
Show correct answer & explanation

Correct answer: B. Selling loss-making investments to realise capital losses that offset capital gains elsewhere in the portfolio — reducing net tax liability

Tax-loss harvesting involves strategically selling investments that have declined in value to book capital losses. These losses can offset capital gains from other investments, reducing the overall tax liability — a legal tax optimisation strategy.
Portfolio Management

Q15. Information Ratio measures:

  1. A. How much information a fund manager has
  2. B. Active return (portfolio return minus benchmark return) per unit of tracking error — measures consistency of alpha generation
  3. C. The fund's total return
  4. D. The amount of research done by the fund manager
Show correct answer & explanation

Correct answer: B. Active return (portfolio return minus benchmark return) per unit of tracking error — measures consistency of alpha generation

Information Ratio = (Portfolio Return - Benchmark Return) / Tracking Error. It measures the active return (alpha) generated per unit of active risk (tracking error). A higher Information Ratio indicates more consistent alpha generation.
Portfolio Management

Q16. Tracking error is:

  1. A. An error in trade execution
  2. B. Standard deviation of the difference between the portfolio's return and its benchmark's return — measures how closely a portfolio tracks its benchmark
  3. C. The fund manager's error rate
  4. D. Difference between buy and sell prices
Show correct answer & explanation

Correct answer: B. Standard deviation of the difference between the portfolio's return and its benchmark's return — measures how closely a portfolio tracks its benchmark

Tracking error is the standard deviation of the return difference between a portfolio and its benchmark. Low tracking error means the portfolio closely mimics the benchmark (like an index fund). Higher tracking error indicates significant active bets.
Advanced Financial Planning

Q17. Education planning for a child requires estimating:

  1. A. Only current school fees
  2. B. Future education cost (inflation-adjusted), timeline to the goal, and the investment strategy and corpus needed today to reach that goal
  3. C. Only college fees
  4. D. The child's likely future income
Show correct answer & explanation

Correct answer: B. Future education cost (inflation-adjusted), timeline to the goal, and the investment strategy and corpus needed today to reach that goal

Education planning requires estimating: current education cost, annual education inflation (typically 8-10%), the time horizon (years to the goal), and then calculating the corpus needed today and the monthly savings/investment required.
Behavioural Finance

Q18. Mental accounting bias occurs when:

  1. A. Investors keep good accounting records
  2. B. Investors treat money differently based on its source or intended use — e.g., treating inheritance money differently from earned income despite money being fungible
  3. C. Investors hire accountants for portfolio
  4. D. Investors calculate net worth precisely
Show correct answer & explanation

Correct answer: B. Investors treat money differently based on its source or intended use — e.g., treating inheritance money differently from earned income despite money being fungible

Mental accounting (Thaler) is the tendency to treat money differently based on its origin or intended purpose. Example: being willing to gamble with 'house money' (market gains) but being very conservative with 'hard-earned savings' — even though both are equal in value.
Complex Products

Q19. Alternative Investment Funds (AIFs) in India are regulated by:

  1. A. RBI
  2. B. SEBI under SEBI (Alternative Investment Funds) Regulations, 2012
  3. C. IRDAI
  4. D. PFRDA
Show correct answer & explanation

Correct answer: B. SEBI under SEBI (Alternative Investment Funds) Regulations, 2012

AIFs are regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. AIFs include private equity, venture capital, hedge funds, and other privately pooled funds with minimum investment of Rs. 1 crore.
Complex Products

Q20. Category III AIF in India refers to:

  1. A. Venture capital funds
  2. B. Infrastructure funds
  3. C. Hedge funds — employing diverse or complex trading strategies including leverage and derivatives
  4. D. Social impact funds
Show correct answer & explanation

Correct answer: C. Hedge funds — employing diverse or complex trading strategies including leverage and derivatives

Category III AIFs include hedge funds and funds employing diverse or complex trading strategies with leverage. They do not get pass-through tax treatment. Category I includes VC, SME, social impact funds. Category II includes PE, debt funds.
Portfolio Management

Q21. Factor investing (Smart Beta) is a strategy that:

  1. A. Invests only in index funds
  2. B. Systematically targets specific return drivers (factors) like value, momentum, quality, low volatility — providing factor risk premium beyond market beta
  3. C. Invests based on fund manager's discretion only
  4. D. Avoids all market indices
Show correct answer & explanation

Correct answer: B. Systematically targets specific return drivers (factors) like value, momentum, quality, low volatility — providing factor risk premium beyond market beta

Factor investing systematically targets well-documented return factors: value (cheap stocks), momentum (recent winners), quality (profitable stable companies), low volatility (less volatile stocks), and size (small caps). Also called Smart Beta or Rules-Based investing.
Advanced Financial Planning

Q22. Life cycle approach to asset allocation suggests:

  1. A. Equal allocation to equity and debt throughout life
  2. B. Higher equity allocation when young (long horizon, high risk capacity), gradually shifting to debt and income-generating assets as retirement approaches
  3. C. More debt when young, more equity when old
  4. D. Always 100% equity regardless of age
Show correct answer & explanation

Correct answer: B. Higher equity allocation when young (long horizon, high risk capacity), gradually shifting to debt and income-generating assets as retirement approaches

Life cycle investing suggests higher equity exposure early in career (more time to recover from market falls, higher human capital) and gradually increasing debt allocation as retirement approaches, reflecting reduced time horizon and need for stable income.
Estate Planning

Q23. A Trust in estate planning is used to:

  1. A. Only for tax evasion
  2. B. Transfer assets to a trustee to hold and manage for the benefit of specified beneficiaries — useful for structured wealth transfer, minor children, and complex family situations
  3. C. Only for real estate holding
  4. D. Only for charitable giving
Show correct answer & explanation

Correct answer: B. Transfer assets to a trustee to hold and manage for the benefit of specified beneficiaries — useful for structured wealth transfer, minor children, and complex family situations

A Trust places assets with a trustee (individual or corporate) to hold and manage for beneficiaries. Trusts can specify conditions for asset distribution (e.g., upon reaching age 25), provide for minor children, and allow complex succession planning unavailable through a simple Will.
Comprehensive Advisory

Q24. Comprehensive financial planning encompasses:

  1. A. Only investment advice
  2. B. Integration of all financial aspects — budgeting, insurance, investments, tax planning, retirement planning, estate planning — into a cohesive holistic plan
  3. C. Only tax planning
  4. D. Only retirement planning
Show correct answer & explanation

Correct answer: B. Integration of all financial aspects — budgeting, insurance, investments, tax planning, retirement planning, estate planning — into a cohesive holistic plan

Comprehensive financial planning integrates all aspects of a client's financial life: income and budgeting, risk management (insurance), investments, tax planning, retirement planning, and estate planning into a single, coordinated plan aligned to all goals.
Complex Products

Q25. Portfolio Management Services (PMS) in India requires minimum investment of:

  1. A. Rs. 25 lakh
  2. B. Rs. 50 lakh
  3. C. Rs. 1 crore
  4. D. Rs. 5 crore
Show correct answer & explanation

Correct answer: B. Rs. 50 lakh

Portfolio Management Services (PMS) in India require a minimum investment of Rs. 50 lakh (enhanced from Rs. 25 lakh in 2019 by SEBI). PMS provides customised portfolio management with a dedicated fund manager for each client's account.
Portfolio Management

Q26. Passive investing through index funds offers which primary advantage over active management?

  1. A. Always higher returns than active funds
  2. B. Lower costs (expense ratio) and consistent replication of benchmark returns — most active funds underperform benchmark net of fees over long periods
  3. C. Guaranteed returns
  4. D. Individual stock selection ability
Show correct answer & explanation

Correct answer: B. Lower costs (expense ratio) and consistent replication of benchmark returns — most active funds underperform benchmark net of fees over long periods

Index funds offer lower expense ratios (0.05-0.2% vs 1-2% for active funds) and track benchmark indices. Research consistently shows that most actively managed funds underperform their benchmark after fees over long periods, making passive investing attractive.
Behavioural Finance

Q27. Recency bias in investing causes investors to:

  1. A. Focus on long-term historical data
  2. B. Overweight recent events or performance — expecting recent trends (bull or bear market) to continue indefinitely
  3. C. Be contrarian to recent trends
  4. D. Make purely rational decisions
Show correct answer & explanation

Correct answer: B. Overweight recent events or performance — expecting recent trends (bull or bear market) to continue indefinitely

Recency bias causes investors to give too much weight to recent events. After a bull market, investors expect it to continue forever (and over-invest in equity). After a crash, they avoid equity entirely. Both behaviours often lead to buying high and selling low.
Advanced Financial Planning

Q28. Monte Carlo simulation in financial planning is used to:

  1. A. Predict exact future portfolio values
  2. B. Run thousands of random scenarios for future market returns to estimate the probability of achieving a financial goal — accounts for uncertainty
  3. C. Calculate exact tax liability
  4. D. Determine exact retirement date
Show correct answer & explanation

Correct answer: B. Run thousands of random scenarios for future market returns to estimate the probability of achieving a financial goal — accounts for uncertainty

Monte Carlo simulation runs thousands of random return scenarios based on historical patterns to estimate the probability of achieving a financial goal under uncertainty. A result of '85% probability of not running out of money' is more informative than a single point estimate.
Portfolio Management

Q29. The Efficient Market Hypothesis (EMH) in its strong form states that:

  1. A. Only technical analysis can beat the market
  2. B. All public and private (insider) information is already reflected in stock prices — no analysis can consistently beat the market
  3. C. Only fundamental analysis works
  4. D. Markets are always irrational
Show correct answer & explanation

Correct answer: B. All public and private (insider) information is already reflected in stock prices — no analysis can consistently beat the market

Strong form EMH states all information (public AND private/insider) is reflected in prices — no investor can consistently earn excess returns. Weak form: prices reflect past trading data. Semi-strong form: prices reflect all public information.
Comprehensive Advisory

Q30. Debt management as part of financial planning includes:

  1. A. Taking as much debt as possible
  2. B. Assessing the cost and purpose of each debt, prioritising high-cost debt repayment, maintaining appropriate debt-to-income ratio, and using debt productively for wealth creation
  3. C. Avoiding all debt regardless of purpose
  4. D. Only credit card management
Show correct answer & explanation

Correct answer: B. Assessing the cost and purpose of each debt, prioritising high-cost debt repayment, maintaining appropriate debt-to-income ratio, and using debt productively for wealth creation

Debt management involves: categorising debt (good debt like home loan vs bad debt like credit cards), prioritising repayment of high-cost debt, maintaining debt-to-income ratio below 40%, and using low-cost debt productively (home loan for asset creation).
Complex Products

Q31. InvITs (Infrastructure Investment Trusts) are similar to REITs but invest in:

  1. A. Residential real estate
  2. B. Infrastructure assets like toll roads, power transmission lines, and pipelines — providing income from operational infrastructure
  3. C. Government bonds
  4. D. Equity shares of infrastructure companies
Show correct answer & explanation

Correct answer: B. Infrastructure assets like toll roads, power transmission lines, and pipelines — providing income from operational infrastructure

InvITs (Infrastructure Investment Trusts) are SEBI-regulated listed trusts that own and operate income-generating infrastructure assets (toll roads, power transmission, gas pipelines). They distribute at least 90% of distributable cash flows to unit holders.
Behavioural Finance

Q32. Framing effect in investment decisions means:

  1. A. Using chart frames for technical analysis
  2. B. The way information is presented (framed) influences decisions — investors react differently to '90% survival rate' vs '10% mortality rate' even though they are identical
  3. C. Creating investment frameworks
  4. D. Building model portfolios
Show correct answer & explanation

Correct answer: B. The way information is presented (framed) influences decisions — investors react differently to '90% survival rate' vs '10% mortality rate' even though they are identical

Framing effect shows that identical information presented differently elicits different responses. Investors may accept a fund described as '75% probability of positive return' but reject the same fund described as '25% chance of loss' — the framing changes the perception.
Estate Planning

Q33. Joint ownership with survivorship rights means:

  1. A. Survivor must repurchase the deceased's share
  2. B. On the death of one owner, their share automatically passes to the surviving joint owner without going through probate or the deceased's estate
  3. C. Both owners share equally until one dies
  4. D. Legal heirs get equal share
Show correct answer & explanation

Correct answer: B. On the death of one owner, their share automatically passes to the surviving joint owner without going through probate or the deceased's estate

Joint ownership with survivorship rights means that on the death of one joint owner, their share automatically passes to the surviving owner(s). This is commonly used in bank accounts and real estate — it bypasses the Will and probate process for those assets.
Portfolio Management

Q34. Correlation coefficient of -1 between two assets means:

  1. A. They always move in the same direction
  2. B. They always move in perfectly opposite directions — combining them creates maximum diversification benefit
  3. C. They are completely unrelated
  4. D. They have identical returns
Show correct answer & explanation

Correct answer: B. They always move in perfectly opposite directions — combining them creates maximum diversification benefit

Correlation of -1 (perfect negative correlation) means the two assets move in exactly opposite directions. When one rises 10%, the other falls 10%. Combining two assets with correlation close to -1 can theoretically eliminate portfolio volatility — maximum diversification benefit.
Comprehensive Advisory

Q35. Total Cost of Investment (TCI) that advisers must explain to clients includes:

  1. A. Only brokerage cost
  2. B. All costs including expense ratio, transaction costs, advisory fees, taxes, and exit loads — giving the true net return picture
  3. C. Only advisory fee charged by adviser
  4. D. Only the fund's management fee
Show correct answer & explanation

Correct answer: B. All costs including expense ratio, transaction costs, advisory fees, taxes, and exit loads — giving the true net return picture

TCI encompasses all costs borne by the investor: fund expense ratio, transaction/brokerage costs, advisory fees, taxes (STT, GST), exit loads, and any other charges. Advisers must ensure clients understand the total cost impact on net returns before recommending products.

How to use this set

Work through the questions in order without expanding the answers first, exactly as you would in the real Series X-B exam. Once you have picked an option, expand the answer to confirm whether you were right and read the explanation, even for questions you answered correctly, since the reasoning behind each option is where most of the learning happens.

If you get a question wrong, note the topic tag above the question and revisit that topic in the Series X-B exam page before your next attempt. When you are ready for exam-condition practice, use the timed mock test above; it shuffles these questions, applies the negative marking rule, and gives you a scored review at the end.