NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process
Meera Iyer invests Rs 10,00,000 for 3 years in a portfolio. Returns are +20% in year 1, -10% in year 2 and +25% in year 3. What is the approximate annualised compound (geometric) return, to one decimal place?
The geometric return is about 10.5%, from a growth factor of 1.35 over three years. The 11.7% figure is only the arithmetic average and overstates compounded growth.
- A11.7%Correct
- B11.9%
- C11.3%
- D11.0%
Explanation
Growth factor = 1.20 x 0.90 x 1.25 = 1.35. Cube root of 1.35 is about 1.1052, so about 10.5%. Check: 1.105^3 = 1.349. The arithmetic mean is (20-10+25)/3 = 11.67%, i.e. 11.7%, which ignores compounding. Therefore the correct geometric return is 10.5%, which is not listed; the option matching the stated answer fails.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Construction Process shows your real accuracy, how long you take and where you lose marks.
More Portfolio Construction Process questions
- In the portfolio construction process for a client of an investment adviser, which step logically comes first?
- Mr. Rakesh Iyer's portfolio has a target allocation of 60% equity and 40% debt, with a policy of rebalancing whenever any asset class drifts…
- Ms. Nair, aged 30, has a long investment horizon, stable salary, an emergency fund and a high risk tolerance. Compared with a retiree needin…
- A portfolio is split 50% in Fund A with an expected return of 12% and 50% in Fund B with an expected return of 8%. What is the expected retu…
- Which statement best describes strategic asset allocation as against tactical asset allocation?
- Mr. Iyer, 35, plans to buy a house in 2 years and needs a down payment of Rs 20 lakh from his current savings. He says he can tolerate large…