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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

Caselet: Sunita, 58, is retiring in two years, depends on her portfolio for income, and has low risk tolerance. Her existing portfolio is 85% in small-cap equity funds. Which adviser recommendation best reflects her risk capacity and need?

The adviser should reduce equity exposure and shift towards debt and lower-volatility assets. Sunita has a short horizon, needs regular income and has low risk tolerance, so her ability and willingness to bear risk are low, and an 85% small-cap allocation is unsuitable.

  1. AKeep the allocation, since equity gives the highest long-term return
  2. BReduce equity exposure and shift towards debt and lower-volatility assets to match her short horizon and income needCorrect
  3. CMove entirely to a single sectoral fund for diversification
  4. DIncrease small-cap exposure to make up for lost time

Explanation

A short horizon, need for income and low risk tolerance reduce both ability and willingness to take risk. The allocation should therefore move towards debt and stable assets. High small-cap concentration conflicts with her profile, and a single sectoral fund increases concentration risk.

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