Investment landscape and securities markets: NISM Series XXI-B notes and practice questions

Q1. Which term is described here? A clearing corporation guarantees settlement of trades and manages counterparty risk, with delivery of securities and funds through depositories and banks.

1. Active strategy
2. Multi-factor models
3. Corporate governance
4. Clearing and settlement

Q2. Which statement best describes “Return objective”?

1. Clients have rights under the investor charter and can seek redress from the manager, then SEBI's complaint platform and online dispute resolution.
2. A return objective states the return a portfolio needs, taking in the client's goals, inflation and the risk the client can accept.
3. CAPM says expected return equals the risk-free rate plus beta times the market risk premium.
4. A portfolio manager must be registered with SEBI and must meet the eligibility, capital and fit and proper requirements.

Q3. Which statement best describes “Secondary market”?

1. Stress testing evaluates portfolio losses under extreme but plausible scenarios, complementing statistical measures.
2. In the secondary market, existing securities are traded between investors, giving liquidity and price discovery.
3. A portfolio manager is a person who, under a contract with a client, advises, directs or manages the client's securities or funds.
4. A mutual fund is a trust that pools investor money, run by an AMC, with a trustee and a custodian providing oversight and safekeeping.

Q4. Which statement best describes “Investing versus speculation”?

1. Investing commits capital for an expected return after analysis of value, while speculation takes a short-term bet mainly on price movement.
2. A risk-averse investor needs more expected return to accept more risk and prefers the less risky choice for the same return.
3. The disclosure document gives clients the manager's investment approach, fees, risks, performance and other facts, and is filed with SEBI.
4. YTM is the single discount rate that equates the bond's price to the present value of its cash flows if held to maturity.

Q5. Which term is described here? Risk tolerance is the client's willingness to take risk, while ability is the financial capacity to bear loss; the lower of the two governs.

1. Beta
2. Risk tolerance and ability
3. Overconfidence
4. Reinvestment risk

Q6. Which statement best describes “Primary market”?

1. An investor can raise return along the CML by borrowing and investing more in the market portfolio, which also raises risk.
2. The yield curve plots yields against maturity, and an upward-sloping curve means longer maturities have higher yields.
3. Calendar rebalancing occurs at set times, while threshold rebalancing occurs when weights drift beyond set limits.
4. In the primary market, securities are issued for the first time and the issuer receives the proceeds.