NISM Series XXI-B · Unit 2 of 12 · about 10% of the paper
Stocks and equity research: NISM Series XXI-B notes and practice questions
Equity as an asset, fundamental and technical analysis, valuation ratios and governance.
What to know in Unit 2
- Fundamental analysis.
- Valuation ratios.
- Technical analysis.
- Corporate governance.
Key terms, examples and exam traps
Equity ownership
An equity share represents ownership in a company, with a residual claim on earnings and assets after creditors are paid.
Example. A shareholder is paid after lenders if a firm winds up.
Exam trap. This statement is false: Shareholders rank ahead of lenders.
Top-down analysis
Top-down analysis begins with the economy, moves to industries and then selects companies.
Example. A manager studies growth, then sectors, then stocks.
Exam trap. This statement is false: Top-down analysis starts with picking a single stock.
Bottom-up analysis
Bottom-up analysis starts with company-level research on business, management and financials, with less weight on the macro view.
Example. An analyst picks a firm on the strength of its balance sheet.
Exam trap. This statement is false: Bottom-up analysis ignores company financials.
Price-earnings ratio
The P/E ratio is the market price divided by earnings per share and shows what investors pay per rupee of earnings.
Example. A share at ₹200 with EPS of ₹10 has a P/E of 20.
Exam trap. This statement is false: P/E is price divided by book value.
Price-to-book ratio
P/B compares market price to book value per share and is often used for banks and asset-heavy firms.
Example. A bank trades at 2.5 times book value.
Exam trap. This statement is false: P/B compares price to dividends.
Return on equity
ROE is net profit divided by shareholders' equity and shows how well a firm earns on owners' capital.
Example. A firm earns ₹15 on every ₹100 of equity.
Exam trap. This statement is false: ROE measures return on total assets.
Free cash flow
Free cash flow is operating cash flow less capital expenditure, and is the cash available to capital providers.
Example. A firm generates cash after funding its capex.
Exam trap. This statement is false: Free cash flow equals reported net profit.
Discounted cash flow
DCF values a business as the present value of its expected future cash flows, discounted at a rate reflecting risk.
Example. An analyst discounts forecast cash flows at 12%.
Exam trap. This statement is false: DCF values a firm using past profits alone.
Technical analysis
Technical analysis studies price and volume patterns to time trades and assumes patterns tend to repeat.
Example. A trader uses moving averages to find a trend.
Exam trap. This statement is false: Technical analysis relies on the audited balance sheet.
Corporate governance
Good governance means a transparent, accountable board that protects minority shareholders, and weak governance is an investment risk.
Example. A manager avoids a firm with frequent related-party dealings.
Exam trap. This statement is false: Governance has no effect on valuation.
Stewardship
Institutional investors, including portfolio managers, are expected to monitor investee companies and vote in the interest of clients.
Example. A manager votes on a resolution after reviewing it.
Exam trap. This statement is false: Voting rights on client holdings can be ignored.
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 term is described here? The P/E ratio is the market price divided by earnings per share and shows what investors pay per rupee of earnings.
- Multi-factor models
- NAV
- Laddering
- Price-earnings ratio
Q2. Which statement best describes “Discounted cash flow”?
- The Sharpe ratio is excess return over the risk-free rate divided by standard deviation, showing return per unit of total risk.
- DCF values a business as the present value of its expected future cash flows, discounted at a rate reflecting risk.
- A clearing corporation guarantees settlement of trades and manages counterparty risk, with delivery of securities and funds through depositories and banks.
- A portfolio manager must be registered with SEBI and must meet the eligibility, capital and fit and proper requirements.
Q3. Which statement best describes “Equity ownership”?
- Client funds and securities must be kept separate from the manager's own, with separate bank and demat accounts for clients.
- Tactical allocation makes short-term deviations from strategic weights to exploit market views.
- The efficient frontier shows portfolios that give the highest expected return for each level of risk.
- An equity share represents ownership in a company, with a residual claim on earnings and assets after creditors are paid.
Q4. Which statement best describes “Bottom-up analysis”?
- The P/E ratio is the market price divided by earnings per share and shows what investors pay per rupee of earnings.
- Credit risk is the risk that the issuer fails to pay interest or principal, which credit ratings help assess.
- Managers must send periodic reports to clients with portfolio composition, transactions, fees and other details, at least once a quarter.
- Bottom-up analysis starts with company-level research on business, management and financials, with less weight on the macro view.
Q5. Which term is described here? Free cash flow is operating cash flow less capital expenditure, and is the cash available to capital providers.
- No guaranteed returns
- Free cash flow
- Anchoring
- Risk limits
Q6. Which term is described here? Bottom-up analysis starts with company-level research on business, management and financials, with less weight on the macro view.
- Stress testing
- Loss aversion
- Mutual fund structure
- Bottom-up analysis
Frequently asked questions
How much of NISM Series XXI-B comes from Unit 2?
Unit 2 (Stocks and equity research) usually carries about 10% of the questions. The whole exam has 120 questions and the pass mark is 60%.
What should I study in NISM Series XXI-B Unit 2?
Fundamental analysis. Valuation ratios. Technical analysis. Corporate governance.
Are these NISM Series XXI-B practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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