Skip to content

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

Mr. Iyer's portfolio target is 60% equity and 40% debt on a total value of Rs 10,00,000. After a market rally, equity is worth Rs 7,00,000 and debt Rs 3,00,000 (total Rs 10,00,000). To return to target weights without adding fresh money, what should be done?

Sell Rs 1,00,000 of equity and buy Rs 1,00,000 of debt. The target equity is Rs 6,00,000 (60% of Rs 10,00,000), but equity now stands at Rs 7,00,000, so the Rs 1,00,000 excess moves into debt to restore the 60:40 mix.

  1. ASell Rs 1,00,000 of equity and buy Rs 1,00,000 of debtCorrect
  2. BSell Rs 1,00,000 of debt and buy Rs 1,00,000 of equity
  3. CSell Rs 40,000 of equity and buy Rs 40,000 of debt
  4. DDo nothing, since equity has performed well

Explanation

Target equity is 60% of Rs 10,00,000 = Rs 6,00,000, but the current equity is Rs 7,00,000, an excess of Rs 1,00,000. Target debt is Rs 4,00,000 against Rs 3,00,000, a shortfall of Rs 1,00,000. So shift Rs 1,00,000 from equity to debt. Rs 40,000 wrongly applies the debt percentage to the excess.

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.

Practise Portfolio Construction ProcessFree diagnostic mock

More Portfolio Construction Process questions