NISM Series XXI-B · Unit 9 of 12 · about 8% of the paper
Risk and risk management: NISM Series XXI-B notes and practice questions
Types of risk, measurement tools and how managers control risk.
What to know in Unit 9
- Risk process.
- VaR and drawdown.
- Liquidity and concentration.
- Controls.
Key terms, examples and exam traps
Risk management process
Risk management is identifying, measuring, monitoring and controlling risks relative to the portfolio's objectives.
Example. A manager sets limits and checks them daily.
Exam trap. This statement is false: Risk management means avoiding all risk.
Standard deviation
Standard deviation measures how widely returns vary around their average and is the common measure of total risk.
Example. A higher standard deviation means a more volatile fund.
Exam trap. This statement is false: Standard deviation measures only downside.
Value at Risk
VaR estimates the largest loss expected over a period at a stated confidence level, under normal conditions.
Example. A one-day 95% VaR of ₹2 lakh.
Exam trap. This statement is false: VaR is the maximum possible loss.
Maximum drawdown
Maximum drawdown is the largest peak-to-trough fall in value over a period, showing the worst loss experienced.
Example. A fund falls from ₹120 to ₹90 before recovering.
Exam trap. This statement is false: Drawdown is the average annual loss.
Tracking error
Tracking error is the standard deviation of the difference between portfolio and benchmark returns, measuring active risk.
Example. A fund with a tracking error of 3% deviates from its index.
Exam trap. This statement is false: Tracking error measures market risk.
Liquidity risk
Liquidity risk is the risk of being unable to sell a position quickly without a large price concession.
Example. A manager cannot exit a small-cap holding without moving the price.
Exam trap. This statement is false: Liquidity risk applies only to bonds.
Concentration risk
Concentration risk arises when a large part of the portfolio is in a few securities or sectors.
Example. A portfolio holds 40% in one sector.
Exam trap. This statement is false: Concentration reduces risk.
Counterparty risk
Counterparty risk is the risk that the other party to a contract fails to meet its obligation.
Example. A derivative contract is traded over the counter.
Exam trap. This statement is false: Exchange-traded trades carry no counterparty protection.
Stress testing
Stress testing evaluates portfolio losses under extreme but plausible scenarios, complementing statistical measures.
Example. A manager tests a 30% market fall.
Exam trap. This statement is false: Stress tests use only normal markets.
Operational risk
Operational risk is the risk of loss from failed processes, people, systems or external events, including errors and fraud.
Example. A trade is mistakenly entered twice.
Exam trap. This statement is false: Operational risk arises only from market moves.
Risk limits
Risk limits, such as caps on single-stock and sector exposure, keep the portfolio within the client's agreed risk profile.
Example. A manager limits a stock to 10%.
Exam trap. This statement is false: Limits are set after losses occur.
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? Operational risk is the risk of loss from failed processes, people, systems or external events, including errors and fraud.
- Passive strategy
- Operational risk
- Investment constraints
- Costs of rebalancing
Q2. Which statement best describes “Liquidity risk”?
- Maximum drawdown is the largest peak-to-trough fall in value over a period, showing the worst loss experienced.
- Liquidity risk is the risk of being unable to sell a position quickly without a large price concession.
- Immunisation matches the portfolio's duration to the liability horizon so that interest rate changes have little net effect.
- The CML shows the risk-return trade-off of efficient portfolios that combine the risk-free asset with the market portfolio.
Q3. Which statement best describes “Counterparty risk”?
- Strong form efficiency says prices reflect all information, public and private, so even insiders cannot earn excess returns.
- Counterparty risk is the risk that the other party to a contract fails to meet its obligation.
- Bottom-up analysis starts with company-level research on business, management and financials, with less weight on the macro view.
- An equity share represents ownership in a company, with a residual claim on earnings and assets after creditors are paid.
Q4. Which term is described here? Concentration risk arises when a large part of the portfolio is in a few securities or sectors.
- Segregation of client assets
- Concentration risk
- Discretionary service
- Performance reporting
Q5. Which term is described here? Tracking error is the standard deviation of the difference between portfolio and benchmark returns, measuring active risk.
- Tracking error
- Active strategy
- Government securities
- Fiduciary duty and conflicts
Q6. Which term is described here? Risk limits, such as caps on single-stock and sector exposure, keep the portfolio within the client's agreed risk profile.
- Efficient frontier
- Risk limits
- Core-satellite
- Secondary market
Frequently asked questions
How much of NISM Series XXI-B comes from Unit 9?
Unit 9 (Risk and risk management) usually carries about 8% 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 9?
Risk process. VaR and drawdown. Liquidity and concentration. Controls.
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.
Next
UpperCrust Academy is independent study material from UpperCrust Wealth. It is not affiliated with NISM, SEBI or AMFI. For education only. Not investment advice. Always confirm the latest syllabus and rules on the official NISM website.