n NISM Certifications
X NISM Series X
Medium

The adverse selection risk in an AIF arises when an investor unknowingly invests in a fund whose risk-return profile does not match their investment needs, leading to possible suboptimal outcomes.

Practice question from NISM Series XIX A- Alternative Investments Funds (AIF) Distributors Mock Test 5 — bank. The correct answer is highlighted below with a full explanation.

Options

  1. A

    Identifying an opportunity leading to potential losses

  2. Investing in a risk-profile mismatch fund

    Correct answer

  3. C

    Investing in an acceptable risk fund

  4. D

    Choosing the most expensive fund manager

Why this is the answer

Mismatch between investor requirements and fund profile constitutes adverse selection risk.

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