Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 3 — Questions and Answers
Question 1: Which document must an investment adviser mandatorily provide to a new client BEFORE rendering any investment advice?
- Portfolio review report
- Risk profiling questionnaire only
- Disclosure document as specified by SEBI (Correct answer)
- Annual performance statement
Correct answer: Disclosure document as specified by SEBI
SEBI regulations require investment advisers to furnish a SEBI-prescribed disclosure document to clients before the advisory relationship begins.
Question 2: The Treynor Ratio differs from the Sharpe Ratio primarily because it uses which denominator?
- Standard deviation of portfolio returns
- Beta of the portfolio (Correct answer)
- Tracking error
- Duration of the portfolio
Correct answer: Beta of the portfolio
The Treynor Ratio uses beta (systematic risk) in the denominator, while the Sharpe Ratio uses standard deviation (total risk).
Question 3: Under SEBI guidelines, an investment adviser registered as an individual can have a maximum of how many clients?
- 50
- 75
- 100 (Correct answer)
- 150
Correct answer: 100
Individual investment advisers registered with SEBI may advise a maximum of 150 clients at any given time per regulatory guidelines.
Question 4: A client's portfolio earns 12% while the benchmark returns 9%. The portfolio's tracking error is 3%. The Information Ratio is:
- 0.5
- 1.0 (Correct answer)
- 1.5
- 3.0
Correct answer: 1.0
Information Ratio = (Portfolio return − Benchmark return) / Tracking error = (12% − 9%) / 3% = 1.0.
Question 5: Which of the following constitutes a conflict of interest that an investment adviser MUST disclose to clients?
- Having a CFA designation
- Receiving distribution commissions from a mutual fund house (Correct answer)
- Charging a flat advisory fee
- Holding SEBI registration
Correct answer: Receiving distribution commissions from a mutual fund house
Receiving distribution commissions creates a conflict of interest because it may bias advice toward higher-commission products, and must be disclosed.
Question 6: Dollar-cost averaging is MOST beneficial in which market condition?
- Continuously rising markets only
- Continuously falling markets only
- Volatile markets with no clear trend (Correct answer)
- Markets with very low volatility
Correct answer: Volatile markets with no clear trend
Dollar-cost averaging reduces average cost per unit most effectively in volatile markets by automatically buying more units when prices are low.
Question 7: Jensen's Alpha measures:
- Total return relative to a peer group
- Excess return above what CAPM predicts given the portfolio's beta (Correct answer)
- The ratio of return to standard deviation
- Portfolio turnover efficiency
Correct answer: Excess return above what CAPM predicts given the portfolio's beta
Jensen's Alpha is the portfolio's actual return minus the CAPM-expected return, indicating the manager's skill in generating abnormal returns.
Investment Advisor NISM Series X-B — Investment Adviser (Level 2) 3
Which document must an investment adviser mandatorily provide to a new client BEFORE rendering any investment advice?