NISM Series XXI-A · Unit 9 of 12 · about 15% of the paper
Portfolio management process: NISM Series XXI-A notes and practice questions
The core method: objectives, asset allocation, security selection, implementation and review. The heaviest unit.
What to know in Unit 9
- Steps of the process.
- Asset allocation and rebalancing.
- Risk management.
- Behavioural traps.
Key terms, examples and exam traps
Investment objective
The investment objective states what the portfolio is meant to achieve, such as growth, income or capital preservation, with risk and time limits.
Example. A client wants long-term growth with moderate risk.
Exam trap. This statement is false: The investment objective is unrelated to the client's needs.
Investment policy
The investment policy records objectives, constraints, allocation ranges and rebalancing rules, guiding the manager.
Example. A document sets limits on equity and single-stock exposure.
Exam trap. This statement is false: An investment policy is a guarantee of returns.
Constraints
Constraints such as liquidity needs, time horizon, tax, legal limits and unique preferences shape what the portfolio can hold.
Example. A client who needs cash in two years cannot hold illiquid assets.
Exam trap. This statement is false: Constraints do not apply to portfolio construction.
Strategic asset allocation
Strategic allocation sets long-term target weights across asset classes, based on objectives and risk profile.
Example. A portfolio aims for 70% equity and 30% debt over the long term.
Exam trap. This statement is false: Strategic allocation changes every day.
Tactical asset allocation
Tactical allocation makes temporary deviations from the strategic weights to benefit from expected short-term moves.
Example. A manager temporarily cuts equity in an expensive market.
Exam trap. This statement is false: Tactical allocation is a permanent allocation.
Top-down approach
The top-down approach starts with economy and sector views and then selects stocks within favoured sectors.
Example. A manager picks sectors first and then stocks.
Exam trap. This statement is false: A top-down approach starts with individual stocks.
Bottom-up approach
The bottom-up approach starts with analysing individual companies, regardless of macro or sector views.
Example. A manager chooses strong businesses one by one.
Exam trap. This statement is false: A bottom-up approach begins with the macro view.
Active management
Active management seeks to outperform a benchmark through selection and timing decisions, at higher cost.
Example. A manager tries to beat the index through stock selection.
Exam trap. This statement is false: Active managers track the index exactly.
Passive management
Passive management replicates an index at low cost, without attempting to outperform.
Example. A portfolio mirrors the benchmark.
Exam trap. This statement is false: Passive managers pick stocks they expect to beat the market.
Rebalancing
Rebalancing returns the portfolio to its target weights by selling what has risen and buying what has fallen.
Example. Equity drifts above target, so the manager trims it.
Exam trap. This statement is false: Rebalancing means adding to the best performers.
Position sizing
Position sizing sets how much of the portfolio is placed in each security, balancing conviction and risk.
Example. A manager limits any single stock to 10% of the portfolio.
Exam trap. This statement is false: Every holding must be of equal size.
Concentrated portfolio
A concentrated portfolio holds few stocks, offering higher potential returns with higher risk.
Example. A PMS holds 15 stocks.
Exam trap. This statement is false: A concentrated portfolio holds hundreds of stocks.
Portfolio turnover
Portfolio turnover measures how much of the portfolio is bought and sold in a year; high turnover raises costs and taxes.
Example. A manager that trades heavily incurs higher charges.
Exam trap. This statement is false: Turnover has no effect on costs.
Cash in the portfolio
Holding cash gives liquidity and flexibility but can drag returns in rising markets.
Example. A manager keeps 8% in cash for opportunities.
Exam trap. This statement is false: Cash always improves returns.
Stop-loss and risk limits
Risk limits such as stop-losses, single-stock caps and sector caps control downside and discipline.
Example. A manager sells a position when it falls to a pre-set level.
Exam trap. This statement is false: Risk limits are unnecessary for skilled managers.
Behavioural biases
Biases like overconfidence, herding and loss aversion lead to poor decisions; a disciplined process counters them.
Example. A manager sticks to the process despite market noise.
Exam trap. This statement is false: Professional managers are immune to bias.
Suitability for PMS
PMS suits investors with large surplus funds, long horizons and ability to bear volatility and concentration risk.
Example. A high-net-worth client with a ten-year horizon is a candidate.
Exam trap. This statement is false: PMS suits investors needing money in a month.
Tax-aware management
Because each trade is taxed in the client's hands, managers consider holding period and tax impact when trading.
Example. A manager avoids selling just before a gain becomes long-term.
Exam trap. This statement is false: Tax does not affect PMS decisions.
Review and monitoring
The portfolio is reviewed regularly against objectives, benchmark and risk limits, and changes are made as needed.
Example. A manager reviews performance every quarter and discusses with the client.
Exam trap. This statement is false: A PMS portfolio is never reviewed once built.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Passive management”?
- A credit rating is an agency's opinion of an issuer's ability to repay, from AAA (highest) downward.
- Concentrating a portfolio in one sector raises risk because sector-specific shocks hit all holdings together.
- Passive management replicates an index at low cost, without attempting to outperform.
- Strategic allocation sets long-term target weights across asset classes, based on objectives and risk profile.
Q2. Which statement best describes “Investment objective”?
- Management fees and expenses may be deductible against gains or income as per the law, subject to conditions.
- Concentrating a portfolio in one sector raises risk because sector-specific shocks hit all holdings together.
- Managers must avoid and disclose conflicts, such as trading in the same securities for own account ahead of clients.
- The investment objective states what the portfolio is meant to achieve, such as growth, income or capital preservation, with risk and time limits.
Q3. Which term is described here? Holding cash gives liquidity and flexibility but can drag returns in rising markets.
- Cash in the portfolio
- Primary market
- Gross versus net returns
- Disclosure document
Q4. Which term is described here? Rebalancing returns the portfolio to its target weights by selling what has risen and buying what has fallen.
- Futures
- Bond
- Rebalancing
- Audit and compliance
Q5. Which statement best describes “Behavioural biases”?
- NAV is the per-unit value of a scheme, equal to net assets divided by units outstanding.
- Biases like overconfidence, herding and loss aversion lead to poor decisions; a disciplined process counters them.
- A credit rating is an agency's opinion of an issuer's ability to repay, from AAA (highest) downward.
- A dividend is a share of profit paid to shareholders, which forms part of total return along with price change.
Q6. Which statement best describes “Active management”?
- Clients have the option to be onboarded directly with the portfolio manager without a distributor, and the manager must offer a direct plan.
- Active management seeks to outperform a benchmark through selection and timing decisions, at higher cost.
- Distributors must disclose commission earned from the portfolio manager to the client.
- Money received sooner is worth more than the same sum later because it can earn a return.
Frequently asked questions
How much of NISM Series XXI-A comes from Unit 9?
Unit 9 (Portfolio management process) usually carries about 15% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XXI-A Unit 9?
Steps of the process. Asset allocation and rebalancing. Risk management. Behavioural traps.
Are these NISM Series XXI-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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