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NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

Equity Investment Strategies and Risks for NISM X-A

Updated 11 October 2026 · Fact-checked

Equity investment strategies are the styles used to pick and manage stocks: growth, value and momentum, run actively or passively. Risks come in two groups: systematic (market-wide, cannot be diversified away) and unsystematic (company or sector specific, can be diversified). To solve questions, identify the style or risk from the clue words.

Understand Equity Investment Strategies and Risks

A strategy is a rule for choosing stocks and for deciding how much to trade. Risk is the chance that your actual return differs from what you expected. Exam questions test whether you can match a description to the right strategy or the right risk.

Growth investing looks for companies whose earnings and sales are expected to grow faster than the market. Such stocks often trade at high price-to-earnings (P/E) and price-to-book ratios and pay little or no dividend, because profits are reinvested. The risk is that growth disappoints and the high price falls sharply.

Value investing looks for stocks priced below their estimated intrinsic value. Value stocks often show low P/E, low price-to-book and a higher dividend yield. The investor expects the price to move up toward intrinsic value. The risk is a value trap: the stock is cheap because the business is genuinely weak, and it stays cheap.

Momentum investing buys stocks that have recently risen and sells those that have fallen, on the view that recent trends continue for a while. It relies on price trends, not on valuation. It can lose sharply when the trend reverses.

Active investing tries to beat a benchmark through stock selection and timing. It costs more (research and higher fund expenses) and may not beat the benchmark. Passive investing aims to match a benchmark index, for example through an index fund or ETF. It has low cost, low turnover and tracking error, but it will never beat the index and it falls when the index falls.

Risks: Systematic (market) risk comes from factors affecting the whole market, such as interest rates, inflation, policy changes and global events. Diversification does not remove it. Unsystematic risk is specific to a company or industry, such as management failure, a lawsuit or a product recall. Diversification reduces it. Company (business) risk is part of unsystematic risk. Liquidity risk is the difficulty of selling a stock quickly at a fair price, common in small and thinly traded stocks, where the bid-ask spread is wide.

Key formulas to remember

Total risk
Total risk = Systematic risk + Unsystematic risk
Diversification cuts unsystematic risk only. Systematic risk remains.
Price-to-earnings ratio
P/E = Market price per share ÷ Earnings per share
High P/E is usually linked to growth stocks, low P/E to value stocks. This is a tendency, not a rule.
Dividend yield
Dividend yield = Dividend per share ÷ Market price per share × 100
Value stocks tend to have higher yield than growth stocks.
Active return
Active return = Portfolio return − Benchmark return
Active managers aim for a positive value. Passive funds aim for close to zero before costs.

How to solve Equity Investment Strategies and Risks questions

Use this method for any question on strategies or risks.

  1. 1Read the last line first to see what is asked: a style, a risk, or a comparison.
  2. 2Underline clue words in the question, such as undervalued, earnings growth, trend, index, market-wide, company-specific, or hard to sell.
  3. 3Match the clue to the term: undervalued means value, fast earnings growth means growth, trend means momentum, index means passive.
  4. 4For risk questions, ask: does it hit the whole market or one firm? Whole market is systematic. One firm or industry is unsystematic.
  5. 5If the clue is difficulty or cost of selling, choose liquidity risk.
  6. 6Check for the words always, only or never in the options. Rules of thumb on P/E and cost are tendencies, so such options are usually traps.
  7. 7Pick the option that fits all clues, not just one.

Quickest way: Clue-word matching

When to use it: Use it for definition and identification questions when time is short.

  1. Undervalued, low P/E, margin of safety: value.
  2. High earnings growth, low dividend, high P/E: growth.
  3. Recent price trend, buy winners: momentum.
  4. Replicates an index, low cost: passive. Beats the benchmark: active.
  5. Whole market, cannot be diversified: systematic. One company or sector: unsystematic.
  6. Hard to sell quickly, wide spread: liquidity.

Common mistakes in Equity Investment Strategies and Risks

  • Saying diversification removes all equity risk.

    Students remember that diversification reduces risk and stop there.

    Fix: Diversification removes only unsystematic risk. Systematic risk stays.

  • Treating a low P/E stock as always a good value buy.

    Cheap looks like value.

    Fix: Value means price below intrinsic value. A cheap weak business is a value trap.

  • Confusing momentum with growth.

    Both are linked to rising stocks.

    Fix: Growth is based on business fundamentals, such as earnings. Momentum is based on price trend.

  • Believing passive funds have no risk.

    Low cost and low effort sound safe.

    Fix: Passive funds carry full market risk and have tracking error. They fall when the index falls.

  • Classifying a company's management failure as systematic risk.

    Students judge by how big the loss is, not by its source.

    Fix: Judge by source. Company-specific events are unsystematic, whatever the size of the loss.

Worked examples

Example 1

An investor buys shares of a firm because its price is well below her estimate of its intrinsic value, though the firm shows modest earnings growth. Which strategy is she following? (A) Growth (B) Value (C) Momentum (D) Passive

Show the solution
  1. The key clue is price below intrinsic value.
  2. Growth would need high expected earnings growth as the main reason. Here growth is only modest.
  3. Momentum would need a recent price rise as the reason. None is mentioned.
  4. Passive would need index replication. None is mentioned.
  5. The clue matches value investing.

Answer: (B) Value

Example 2

Which of the following is an example of unsystematic risk? (A) A rise in repo rate that lowers all stock prices (B) A fall in the stock market due to a global sell-off (C) A fall in one company's share price after its auditor resigns and fraud is alleged (D) A rise in inflation across the economy

Show the solution
  1. Ask for each option whether it affects the whole market or one firm.
  2. A rise in repo rate affects the whole market, so it is systematic.
  3. A global sell-off affects the whole market, so it is systematic.
  4. Inflation across the economy is systematic.
  5. Fraud allegations at one company affect that firm, so the risk is company-specific and unsystematic.

Answer: (C) is unsystematic risk, and it can be reduced by diversification.

Exam tips

  • Most questions are one-line identifications. Learn the clue words for each style and risk.
  • Watch for the trap that diversification eliminates all risk. It does not remove systematic risk.
  • Be careful with absolute words such as always and only. Style traits like low P/E for value are tendencies.
  • Check the marks on the question. Wrong answers cost 25% of the marks assigned, so a 2-mark question costs more, and you should skip only if you cannot narrow the options.
  • For active vs passive, remember cost and benchmark: passive is low cost and matches the index, active is higher cost and tries to beat it.

Practice questions from Investing in Stocks

Equity Investment Strategies and Risks in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Equity Investment Strategies and Risks: frequently asked questions

What is the difference between growth investing and value investing?

Growth investing picks companies expected to grow earnings faster than the market, even at high prices. Value investing picks stocks priced below intrinsic value. Growth stocks tend to have high P/E and low dividends, and value stocks tend to have low P/E and higher dividends.

What is the difference between active and passive investing?

Active investing tries to beat a benchmark through stock selection and timing, at higher cost. Passive investing tries to match a benchmark index at low cost, typically through index funds or ETFs.

What is the difference between systematic and unsystematic risk?

Systematic risk affects the whole market and cannot be diversified away. Unsystematic risk is specific to a company or industry and can be reduced by holding a diversified portfolio.

What is liquidity risk in stocks?

It is the risk that you cannot sell a stock quickly at a fair price. It is higher in thinly traded stocks, where the gap between buy and sell prices is wide.