Asset allocation and investment strategies: NISM Series X-A notes and practice questions

Q1. Which statement best describes “Active versus passive investing”?

1. Rebalancing restores the target allocation by selling what has grown overweight and buying what lags, controlling risk.
2. Active investing tries to beat a benchmark through selection; passive investing tracks it at low cost.
3. When inflation rises, central banks tend to raise rates to cool demand, which affects bond prices and borrowing costs.
4. No intermediary may promise or guarantee returns on market-linked products; doing so is a violation.

Q2. Which statement best describes “Core and satellite”?

1. NAV is the per-unit value of a scheme, equal to total assets less liabilities divided by units outstanding.
2. Inflation raises expenses over a long retirement, so some growth assets are needed even after retirement.
3. A registered investment adviser charging a fee should generally recommend direct plans to avoid receiving commissions.
4. A core and satellite approach keeps most assets in low-cost diversified holdings and a smaller part in higher-conviction ideas.

Q3. Which statement best describes “Rebalancing”?

1. Tax deducted at source is tax withheld by the payer on specified payments such as salary and interest, and credited to the payee's tax account.
2. Rebalancing restores the target allocation by selling what has grown overweight and buying what lags, controlling risk.
3. Systematic risk affects the whole market and cannot be diversified; unsystematic risk is specific to a company or sector and can be reduced by diversification.
4. Term insurance pays the sum assured on death during the term and nothing on survival, making it the cheapest pure protection.

Q4. Which statement best describes “Tactical asset allocation”?

1. Tactical allocation makes short-term shifts away from strategic weights to exploit perceived opportunities.
2. The riskometer shows a scheme's risk on six levels from low to very high, and should match the client's risk profile.
3. A financial market is where financial assets are created and traded, and it is divided into money market, capital market and foreign exchange market.
4. Debt funds are exposed to interest-rate risk, credit risk and liquidity risk, and returns are not guaranteed.

Q5. Which term is described here? Lump sum investing puts money in at once while SIP spreads entry over time to average the cost and reduce timing risk.

1. Senior Citizens' Savings Scheme
2. Lump sum versus SIP
3. Set-off and carry forward
4. Financial planning process

Q6. Which statement about “Behavioural biases” is correct?

1. Residential status depends only on citizenship.
2. Biases such as overconfidence, loss aversion and herding lead investors to make poor decisions; advisers help counter them.
3. Investors always behave rationally.
4. The bucket strategy puts everything in one asset.