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NISM Series X-A · Chapter 14: Introduction to Modern Portfolio Theory

Q: How many questions come from Chapter 14 (Introduction to Modern Portfolio Theory) in the NISM Series X-A exam?

The workbook gives marks by module; shared over the module's chapters by length, this chapter is worth about 3 of the 150 marks, across MCQs and case studies.

आधुनिक पोर्टफोलियो सिद्धांत का परिचय · NISM-Series-X-A: Investment Adviser (Level 1) Certification Examination

~3 of 150 marks 90 MCQs + 9 case studies · 150 marks · 3 hours · 60% to pass · −25% of a question's marks per wrong answer 14 practice questions in our bank + 1 case study

What this chapter covers

Markowitz's Modern Portfolio Theory: its assumptions, risk-averse, risk-neutral and risk-seeking investors and the certainty equivalent rate, expected return and variance of single assets and portfolios, the two-asset risk formula, correlation, the efficient frontier, optimisation inputs and estimation risk.

आधुनिक पोर्टफोलियो सिद्धांत — अपेक्षित रिटर्न, वैरिएंस, सहसंबंध, एफिशिएंट फ्रंटियर और अनुमान जोखिम।

What to master before the exam

MPT (Markowitz, 1952; Nobel 1990) quantifies diversification through covariance and correlation; investors want the highest return for a given risk.
A risk-averse investor rejects a fair game, a risk-neutral investor looks only at expected return, a risk-seeking investor will play a fair game; the certainty equivalent rate is the risk-free rate that equals a risky portfolio in utility.
Expected return = Σ probability × return (stock A in the workbook: 9.9%); sample variance divides squared deviations by n − 1, and standard deviation is its square root.
Portfolio return = weighted average return; two-asset variance = w₁²σ₁² + w₂²σ₂² + 2w₁w₂ρσ₁σ₂; perfectly correlated assets give no diversification benefit; n assets need (n² − n) ÷ 2 covariances (1,225 for 50).
The efficient frontier is the umbrella-shaped set of portfolios with the best return for each level of risk; optimisation needs expected returns, standard deviations and correlations, and errors in these create estimation risk.

Exam tip: Module 5 (Chapters 14–16) carries 20 marks. Expect the two-asset portfolio variance numerical and the (n² − n) ÷ 2 count; also know which investor type rejects a fair game.

Sample questions from this chapter

Five of the 14 questions in our free bank. Open the answer to see the explanation — every question in the mock test has one, in English and Hindi.

Question 1

If a portfolio comprises two stocks, and if the correlation coefficient between the two stocks were to decrease over time, everything else remaining constant, the portfolio’s risk would:

यदि किसी पोर्टफोलियो में दो शेयर हों और समय के साथ दोनों शेयरों के बीच correlation coefficient घट जाए, बाकी सब कुछ स्थिर रहे, तो पोर्टफोलियो का जोखिम:

Decreaseघटेगा
Remain constantस्थिर रहेगा
Increaseबढ़ेगा
Fluctuate positively and negativelyसकारात्मक और नकारात्मक रूप से उतार-चढ़ाव करेगा

Show answer & explanation

Answer: A — Decrease
Portfolio risk depends on the weights, the individual standard deviations and, more importantly, the correlation between the investments — the poorer the correlation, the lower the portfolio risk (the covariance term in the portfolio variance formula shrinks).
पोर्टफोलियो जोखिम वेट, व्यक्तिगत standard deviation और, सबसे महत्वपूर्ण, निवेशों के बीच correlation पर निर्भर करता है — correlation जितना कमज़ोर, पोर्टफोलियो जोखिम उतना कम (portfolio variance सूत्र का covariance पद घट जाता है)।

Question 2

Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the:

शेयरों के एक पोर्टफोलियो में, सर्वोत्तम संभव संयोजनों के समूह वाला आवरण वक्र (envelope curve) क्या कहलाता है?

Efficient portfolioEfficient portfolio (कुशल पोर्टफोलियो)
Utility curveUtility curve (उपयोगिता वक्र)
CMLCML (कैपिटल मार्केट लाइन)
SMLSML (सिक्योरिटी मार्केट लाइन)

Show answer & explanation

Answer: A — Efficient portfolio
The efficient frontier is the umbrella-shaped set of optimal (efficient) portfolios offering the highest expected return for a given level of risk or the lowest risk for a given return; portfolios below it are sub-optimal.
Efficient frontier इष्टतम (efficient) पोर्टफोलियो का छतरी-आकार का समूह है जो दिए गए जोखिम पर सर्वाधिक अपेक्षित रिटर्न या दिए गए रिटर्न पर न्यूनतम जोखिम देता है; इसके नीचे के पोर्टफोलियो sub-optimal होते हैं।

Question 3

Harry Markowitz’s article “Portfolio Selection”, which laid the foundation of Modern Portfolio Theory, was published in The Journal of Finance in:

हैरी मार्कोविट्ज़ का लेख “Portfolio Selection”, जिसने Modern Portfolio Theory की नींव रखी, The Journal of Finance में किस वर्ष प्रकाशित हुआ?

1990वर्ष 1990
1964वर्ष 1964
1952वर्ष 1952
1972वर्ष 1972

Show answer & explanation

Answer: C — 1952
The article appeared in 1952; Markowitz received the Nobel Prize in Economics in 1990. MPT quantified diversification by introducing the statistical notion of covariance, or correlation, between assets.
यह लेख 1952 में प्रकाशित हुआ; मार्कोविट्ज़ को 1990 में अर्थशास्त्र का नोबेल पुरस्कार मिला। MPT ने एसेट्स के बीच covariance या correlation की सांख्यिकीय अवधारणा लाकर diversification को मापने योग्य बनाया।

Question 4

As per the assumptions of Modern Portfolio Theory, given a choice between two assets with an equal rate of return, an investor will select:

Modern Portfolio Theory की मान्यताओं के अनुसार, समान प्रतिफल दर वाले दो एसेट्स में से चुनने पर निवेशक किसे चुनेगा?

The asset with higher riskअधिक जोखिम वाला एसेट
The asset with lower riskकम जोखिम वाला एसेट
Either asset, since risk is irrelevantकोई भी एसेट, क्योंकि जोखिम अप्रासंगिक है
The asset with the higher dividendअधिक डिविडेंड वाला एसेट

Show answer & explanation

Answer: B — The asset with lower risk
MPT assumes investors want to maximise return for a given level of risk, so between two assets with equal return they choose the one with lower risk; decisions rest solely on expected return and risk.
MPT मानती है कि निवेशक दिए गए जोखिम पर रिटर्न अधिकतम करना चाहते हैं, इसलिए समान रिटर्न वाले दो एसेट्स में वे कम जोखिम वाला चुनते हैं; निर्णय केवल अपेक्षित रिटर्न और जोखिम पर आधारित होते हैं।

Question 5

A prospect that has a zero risk premium is called a fair game. A risk-averse investor will:

शून्य risk premium वाले अवसर को fair game कहा जाता है। एक जोखिम-विमुख (risk-averse) निवेशक:

Accept itइसे स्वीकार करेगा
Be indifferent towards itइसके प्रति उदासीन रहेगा
Accept it only with borrowed moneyइसे केवल उधार के पैसे से स्वीकार करेगा
Reject itइसे अस्वीकार करेगा

Show answer & explanation

Answer: D — Reject it
Risk-averse investors reject a fair game; they invest only in risk-free opportunities or those with a positive expected risk premium — the greater the risk, the greater the risk premium demanded.
Risk-averse निवेशक fair game को अस्वीकार करते हैं; वे केवल जोखिम-मुक्त अवसरों या सकारात्मक अपेक्षित risk premium वाले अवसरों में निवेश करते हैं — जोखिम जितना अधिक, माँगा गया risk premium उतना अधिक।

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All X-A chapters

1. Introduction to Personal Financial Planning · 7 marks 2. Time Value of Money · 7 marks 3. Evaluating the Financial Position of Clients · 10 marks 4. Debt Management and Loans · 13 marks 5. Introduction to the Indian Financial Markets · 4 marks 6. Securities Market Segments · 6 marks 7. Introduction to Investment · 3 marks 8. Investing in Stocks · 8 marks 9. Investing in Fixed Income Securities · 13 marks 10. Understanding Derivatives · 6 marks 11. Mutual Funds · 14 marks 12. Portfolio Manager · 4 marks 13. Overview of Alternative Investment Funds (AIFs) · 5 marks 14. Introduction to Modern Portfolio Theory · 3 marks 15. Portfolio Construction Process · 7 marks 16. Portfolio Performance Measurement and Evaluation · 10 marks 17. Operational Aspects of Investment Management · 13 marks 18. Key Regulations · 10 marks 19. Ethical Issues · 3 marks 20. Grievance Redress Mechanism · 4 marks

← Chapter 13: Overview of Alternative Investment Funds (AIFs) Chapter 15: Portfolio Construction Process →

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