International College of Financial Planning

Online Work book for CFP Students Investment Planning

1 If a bond is selling at a premium ____ 1 Mark a. It’s an attractive investment b. It’s coupon rate is below market rate c. It’s current yield is lower than the coupon rate d. It’s realized compound yield will be less than the yields to maturity

(Answer- It’s current yield is lower than coupon rate- c )

2 A portfolio manager can hedge a share portfolio by, 1a. Buying call options b. Selling call options c. Buying Index options d. Selling Put options

(Answer- Selling call options – b)

3 Mr. X buys 50 TELCO December Rs. 350/- call options for Rs.15. The current share price is Rs.345/-. The breakeven share price, ignoring transaction cost is Rs.____?

a. 350 b. 360 c. 365 d. None 4

(Answer- 365- c)

4. Which of the following is not a characteristic of a balance fund? 2 a. It is less risky than growth funds b. It is more risky than income funds c. It must invest in both equity & bonds in equal amounts d. It provides both growth & income objectives.

(Answer – It must invest in both equity & Bond in equal amounts- c) 5. The best method of valuing a share is_____ 2

a. Book value based on net tangible assets b. Present value of all the dividends to be received from holding that share c. Liquidation value based on the proceeds of liquidation of the company d. Apply the P/E ratio to expected earnings per share.

(Answer-PV of all the dividends to be received from holding that share- b) 6. ABC is raising funds through a bond issuance to fund a new power plant at Noida UP. They are issuing two year maturity, Zero coupon bond with face value = 1000, yield = 4%. What price would you pay for this ABC zero coupon bond today? 4

a. 920 b. 924.56 c. 925.95 d. 960

(Answer- 924.56 –b) Working: FV = 1000, N = 2, I =4%, find PV = 924.56 7. The CAPM is a model that___ 2

a. Determines the geometric return of a security b. Determines time weighted return c. Explain return in terms of risk d. Explains systematic risk

(Answer- Explain returns in terms of risk- c) 8. Market Efficiency means 4

a. that the investor can predict prices b. That the prices are set relative to current information c. That the prices are set randomly. d. Actual returns equals expected return

1. all statements are false 2. all statements are true 3. Only B is true. 4. none of the above

(Answer – Only b is true -3) 9. Functions of SEBI are:

a. Regulate the securities market b. Promoting the development of the securities market c. Protecting the interests of Investors in Securities d. Regulating banking and Money Market activities.

1. All statements are true

2. All statements are false 23. A, B & C are true while D is False. 4. A, C & D are true while B is false.

(Answer- a, b & c are true while d is false- 3 10. The stock Market ___

a. Exists in any country primarily for the purpose of assisting corporate & Government to raise the capital they need to fund their operations.

b. Is an ever visible barometer of a nation’s economic vitality. c. Is an efficient allocator of scarce capital resources from the net savers –

individuals & institutions to net users of the savings mainly companies. 1. Only A & C Is true 2. Only A & B is true 3. All statements are false 4. All statements are true. 2

(Answer- All statements are true- 4) 11. The activities of the stock exchange are regulated by

a. RBI b. SEBI c. SBI d. None of the above 1

(Answer- SEBI- b) 12. ___ is the oldest exchange in the country & also in ASIA.

a. BSE b. NSE c. MCX d. CBOE 1

(Answer- BSE- a) 13. Cheque writing facility is usually offered by ___

a. MMMF’s & other liquid schemes of short duration b. Index funds c. None of the above

(Answer- MMMF’s & other liquid schemes of short duration-a ) 1 14. _____ is a highly liquid, low risk asset.

a. Cash b. Property c. Equity

d. Don’t know

(Answer- Cash-a) 15. A 10% semi annual bond with YTM of 12% & 10 years to maturity has a price equal to _______

a. 1051.65 b. 1159.88 c. 888.89 d. 885.30 4

(Answer- 885.30- d)Working: FV = 1000, N = 10 X 2, I = 12% / 2, pmt = 50, find PV = 885.30 16. Three securities 1, 2 & 3 have the following data:

(Wt) probability of security std deviation co. coeff 0.3 6% 0.4 R12 0.5 9% 0.6 R13 0.2 10% 0.7 R23

Calculate standard deviation of portfolio return. a. 7% b. 8.25% c. 7.13% d. 6.58%

(Answer- 7.13% -c) 4

17. Following are the closing quotes in Rs. of script in market for 10 days. Day quote

1 145 2 143 3 148 4 150 5 151 6 152 7 155 8 154 9 153 10 149

Calculate standard deviation of the time series a. 2.85 b. 7.05 c. 13.4 d. 3.66 4

(Answer- 3.66-d) 18. A expected return = 20%, B expected return = 10%, C expected return = 12%, D expected return = 9%. You invest 40,000/-. What more information is needed to find the holding period return of each of the companies of the portfolio?

a. Proportion of investments b. Beta of the shares 1c. Market value of the investments d. None of the above

(Answer- Proportion of investments-a) 19 Security weight std deviation co- coeff

a. 0.1 5 0.5 AB b. 0.1 10 0.8 AC c. 0.8 15 0.3 BC

Find standard deviation of portfolio. a. 11.76 b. 12.75 c. 14.97 d. 13.82

2 (Answer- 12.75- b) 20. The average PUT option exercise price of HCL is 370. Current share price is Rs. 360. Premium is Rs.15/-. Intrinsic value of the PUT, ignoring transaction cost is ___.

a. Nil b. 5 c. 15 d. 10

2(Answer- 10—d) 21. Santosh has purchased 100 shares of X ltd stock at Rs.60/- with 50% margin required & 35% maintenance margin required. If the stock drops to Rs.40/-. How much money does he have to put up?

a. 0 b. 615 c. 400 d. 600

(Answer- 0-a) 4

22. 100000, T bill is selling at 98000 today. It will mature in 60 days. The annual

yield is a. 13.08 b. 13 c. 12.41 d. 13.25 4

(Answer- 12.41- c)Working I = [(fv/pv)-1] x 365/n 23. Equal amount of investment is made in portfolio consisting of securities X & Y. Standard deviation of X is 12.43%, standard deviation of y is 16.54%, and Co relation coefficient XY is 0.82. The interactive risk of the portfolio measured by covariance is ______

a. 145.64 b. 156.22 c. 168.59 d. 172.56 2

(Answer- 168.59-c) Working 16.54 X 12.43 X 0.82 = 168.59% 24. You are running a dividend yield fund for a leading Mutual Fund house. The most recent dividend of all is fine business services common stock was Rs. 2.35. The dividends are expected to grow at 4% indefinitely. If you are looking at a 12% return how much will you be willing to pay for one share of all is fine business services?

a. 24.79 b. 29.38 c. 29.79 d. 30.55 4

(Answer- 30.55 –d) Working = 2.35(1.04) = 30.55 0.12 – 0.04 25. You are an owner of an apartment complex with 300 units each of which can fetch Rs. 1000 p.m. as rentals. The apartment complex has an average occupancy rate of 75%. The expenses for maintaining, up keeping the apartment comes to around 10 lacs per annum. Based on the concept of capitalized earning approach & assuming that you require a capitalization rate of 10% how much is the complex worth now?

a. 1.50 cr b. 1.70 cr c. 2 cr d. None 4

(Answer- 1.70 crores-b) 26. An Option that can be exercised anytime up till expiry is ______

a. European option b. American option c. Arbitrage d. Contango 1

(Answer- American –b)

27. Exploiting price anomalies in the market to make risk less profit is know as _________

a. Contango b. Arbitrage c. Hedging d. None of the above 2

(Answer- Arbitrage-b)

28. _____ is protecting the value of an asset or portfolio of assets against price fluctuations

a. Hedging b. Arbitrage c. Contango d. None of the above 1

(Answer- Hedging-a)

29. The normal relationship between forwards & futures price and spot prices is ______

a. Contango b. Hedging c. Arbitrage d. None of the above 1

(Answer- Contango-a)

30. ____ Option can be exercised at expiry only but not before. a. American option b. European option c. Indian option d. None 2

(Answer- European –b)

31. _______ is the process of transferring ownership rights of derivatives from an individual who owns the underlying asset to the clearing house.

a. Contango

b. Novation c. Margins d. Nil 2

(Answer- Novation-b)

32. _____ is the full price of the put or call option a. Premium b. Strike price c. Spot price d. Time Value

(Answer- Premium-a) 1

33. ______ is the current price of an asset a. Premium b. Strike price c. Spot price d. Time Value

(Answer- Spot price-c) 1

34. Strategic options position of buying or selling both Calls & Puts on the same underlying assets is _____

a. Put-Call Parity b. Straddle c. Protective Put d. Naked Call

(Answer- Straddle-b) 2

35. The value of an option if it were to expire immediately______. a. Time value b. Intrinsic value c. None

(Answer- Intrinsic value-b) 1

36. The excess of the market price of any option over its intrinsic value is called the _______ of the option.

a. Time value b. Intrinsic value c. None 1

(Answer- Time value-a)

37. _______ is an option strategy that limits the values of a portfolio within two bounds

a. Spread b. Straddle c. Protective put d. Collar 2

(Answer- Collar-d)

38. ____ is an option strategy combining two or more Call options or two or more Puts on the same stock with differing exercise prices or times to maturity.

a. Spread b. Straddle c. Protective put d. Collar 2

(Answer- Spread –a)

39. (A) Fundamental Analysis looks at matters like future earnings & dividends to assess intrinsic value. (B) Technical analysis involves a study of past prices & volumes to determine the direction of price movement

a. Only A is true b. Only B is true c. Both A & B are true d. Both A & B are false. 2

(Answer- Both are true –c)

40. Mutual Funds value their investments on a __________ basis on the valuation date.

a. Mark to Margin basis b. Mark to market basis c. Mark to money basis d. Nil 1

(Answer- Mark to market-b)

41. ______ is a highly liquid, low risk asset. a. Cash b. Fixed deposit c. Gold d. Shares 2

(Answer-Cash-a)

42. Spot value of Nifty is 2140; an investor buys a one month nifty 2157 call option for a premium of Rs.7. The option is _____

a. In the money b. At the money c. Out of the money d. None of the above 2

(Answer- Out of the money-c) Call = S – (E +P) = 2140 – 2164 = - 24; negative cash flow therefore out of the money.

43. A call option at a strike of Rs.176/- is selling at a premium of Rs. 18/-. At what price will it breakeven for the buyer of the option.

a. 196 b. 204 c. 187 4d. 194

(Answer- 194-d) Breakeven at 176 + 18 = 194

44. Typically option premium is ___ a. Less than the sum of intrinsic value & time value b. Greater than the sum if intrinsic value & time value c. Equal to the sum of intrinsic value & time value. d. Independent of intrinsic value & time value.

(Answer- Equal to the sum of intrinsic value &time value-c) 2

45. A stock is currently selling at Rs. 70/-. The call option to buy the stock at Rs. 65 is 9. What is the time value of the option?

a. 4 b. 5 c. 3 d. 2

4(Answer-4 a) P = IV + TV TV = P – IV = 9 – (70 – 65) = 4

46. A stock currently sells at 120, the put option to sell the stock sells at Rs. 134/- cost Rs18/-. The time value of the option is ___

a. 18

b. 4 c. 14 d. 12

(Answer-4 –b) 4

47. Anand is bullish about the index. Spot nifty stands at 2200. He decides to buy one 3 month nifty call option contract with a strike of 2260 at a premium of Rs.15/- per call. Three months later, the index closes at 2295. His payoff on the position is ____. (contract size = 100)

a. 4000 b. 9000 c. 2000 d. None of the above 2

(Answer- 2000-c) Working: Expiration price = 2295 Less Strike price = 2260 Option value = 35 Less premium = 15 20 x 100 =2000

48. Chetan is bullish about the index. Spot nifty stands at 2200. He decides to buy one 3 months nifty call option contract with a strike of 2260 at Rs. 60 a call. 3 months later the index closes at 2240. His payoff on the position is _____ .( contract size = 100)

a. -7000 b. -12000 c. -4000 d. -6000

4(Answer—6000-d) Working: Expiration price = 2240 Less strike price = 2260 - 20 As there is a negative cash flow i.e. Out of the money therefore will not exercise and only loses the premium. = -60 X 100 = - 6000

49. _____ are new ordinary shares issued to existing shareholders in some proportion to the number of existing shares held.

a. Preference shares b. Rights issue c. Bonus Issue d. Warrants

(Answer- Bonus issue-c) 2

50. Security X & Y in ratio of 70 :30, the expected rate of return with their

probability of occurrence is Security X returns Probability Security y returns Probability

40% 10% 40% 40% 30% 20% 30% 30% 20% 30% 20% 20% 10% 40% 10% 10%

Calculate Average return of portfolio a. 25 b. 23 c. 30 d. 20 4

(Answer- 23-b)

51. Security weight std deviation co- coeff a. 0.2 7 0.5 AB b. 0.6 20 0.6 AC c. 0.2 5 0.7 BC

Find standard deviation of portfolio. a. 12.64% b. 12.75% c. 14.58% d. 13.50%

4(Answer- 13.5%-d)

52. Security ‘A’ has an average rate of return of 12% with standard deviation of 3%. Return on risk free government security is 6%. Its risk adjusted return is ___

a. 4.55 b. 4 c. 3 d. 2

(Answer- 2 –d) 2

53. An investor bought 60 call options at 4 and simultaneously sold a 70 call at 2. What is the breakeven price?

a. 66 b. 64 c. 60 d. 62

(Answer- 62-d) 2

54. Equal amount of investment in X & Y. Standard deviation X = 12.43, Standard deviation y = 16.54, correlation coefficient xy = 0.82. Interactive risk of the portfolio measured by covariance is_____

a. 168.59 b. 156.22 c. 172.56 d. 145.64

(Answer- 168.59- a) 4

55. You invest in 4 securities. Company A has an expected return of 20%, company B has expected return of 10%, company C = 12%, & company D = 9%. You invest 40000/- . Assume portfolio is equally weighted. What is the return on portfolio?

a. 12.75% b. 23.1% c. 11.79% d. None of the above 4

(Answer- 12.75% -a)

56. The august call option exercise price of HLL is 370. The current share price is 360. The premium is Rs.15. The intrinsic value of the call, ignoring transaction cost is____.

a. 10 2b. 5 c. Nil d. 15

(Answer- Nil-c) 57. Suppose you invest in 4 securities A= 20%, B =10%, C = 12%, D =9%. Investment amount Rs.40000/- What information is needed to find return on portfolio?

a. Proportion of investment’ b. Beta of share c. Market value of investment d. None of the above

(Answer- Proportion of investments-a) 2

58. You own 3 scripts with their market value at Start of year End of year (3rd) total growth.

X 200000 245000 22.5%

Y 300000 375000 25% Z 500000 430000 (14.0%) Calculate the CAGR of portfolio.

a. 5% b. 10.26% c. 1.64% d. 11.16%

(Answer 1.64%- c) 4 59. Weights X = 70% Y = 30%

Average return = 20%, 30% Standard deviation 10%, 10% COV xy 16% Calculate the portfolio risk.

a. 4.6 b. Nil c. 8.04 d. 9.35

(Answer- 8.04-c) 4 60. Bond of face value 1000, coupon = 10%, n = 5 years, makes half yearly payment. The bond is priced at 1081.10. Calculate the YTM of the bond

a. 8 b. 9 c. 7 d. 10

(Answer- 8 –a) 2

61. You are owner of a plot with 120 units. Each fetch Rs.750 p.m. rental. Average occupancy rate is 80%. Expenditure for maintenance is 3lakhs per annum. Use concept of capital earning approximately and assume that you require a capitalization rate of 12%. How much is the complex worth.

a. 90 lakhs b. 65 lakhs c. 60 lakhs d. 47 lakhs 4

(Answer- 47 lakhs-d) Working: 120 x 750 x 12 x 0.8 = 864000 – 300000 = 564000/ 12% = 47 lakhs 62. Suresh has two mortgage loans. Interest rate and other conditions remaining same, repayment in 15 years & 30 years. Evaluate both EMI’s. Repayment of loan in 15 years instead of 30 years will require? a. Twice as large as 30 years loan payment

b. More than twice as large as 30 years loan repayment c. Half the size of 30 years loan payment d. Less than twice as large as the 30 years loan payment. 2

(Answer-Less than twice as large as the 30 years loan payment-d)

63. August Put option exercise price 370, current share price 360, premium 15. Calculate intrinsic value ignoring transaction cost.

a. Nil b. 5 c. 10 d. 15

2(Answer-10-c)

64. You invest in 4 securities E, F, G, & H with expected returns respectively as 20%, 10%, 12%, & 9%. You invest Rs50000/-. What information would you require for further buying of share___

a. If the company is expected to distribute its large reserves in the near future. b. If the company is coming out with a fresh issue to finance its expansion. c. If the company is taking efforts to cut down its expenses d. None.

(Answer-None-d) 1 65. Shraddha comes to you for advice. She has a large short term gains in XYZ ltd. She has heard rumors that they make the stock price tumble and is concerned about losing her gains. Now due to her tax situation she does not want to realize a taxable gain. Assume no transaction cost. What would you advise?

a. Buy a Put option b. Buy a call option c. Sell a Put option d. Sell a call option

(Answer- Buy a Put Option-a) 1 66. Fund Avg Return Std deviation beta

a. 20 25 1.3 b. 12 16 0.9 c. 15 19 1.1 Market 10 15 1.0 Risk free rate = 6%

Rank the funds based on Sharpe Ratio best to market. A. bac

B. cba C. acb D. abc

4 (Answer- acb-c) 67. Mrs. Patel works for post office. She deposits 1000 every birthday. Paid interest 8%

from age 20 until she retired. If she had 237941.22 at the retirement age. Compute her retirement age?

a. 55 b. 58 c. 57 d. 59

2(Answer-58-b) Working: I = 8%, pmt = 1000, FV = 237941.22, mode = begin, n = ? = 58 68. A bond has face value 1000, coupon rate of 7.5%, the market rate comes down to 6%. If the bond is perpetual the value of the bond is ____?

a. 1200 b. 800 c. 1250 d. 1000

(Answer-1250-c) 2Working: 75/6% = 1250 69. 100000 T bill is selling at 98000 today. It will mature in 60 days. The annual yield is__?

a. 13% b. 13.08% c. 13.25% d. 12.41%

(Answer- 12.41% -d) 2 70. Name Date Price No. of shares

Tisco 10/1/03 175 2000 Telco 16/1/03 156 1500 Grasim 18/3/03 220 1000 Hindalco 16/2/03 340 1000 All the shares have face value of Rs. 10/- On Dec’31

Name Dividend Price Date of Div

Tisco 60% 475 8/4/04 Telco 40% 585 12/4/04 Grasim 80% 1315 18/5/04 Hindalco 35% 1545 26/5/04

Sri finds that Beta of all the stocks in his portfolio is high. Average 1.5. What does it mean for his risk & return?

a. The portfolio will be sensitive to market risk & return b. The portfolio will exhibit higher return and risk than the market c. The portfolio will earn a higher risk adjusted return compared to market d. The portfolio will always earn a rate of return that is higher than the market.

(Answer- d) 4

71. Suppose you invest in 4 securities A, B, C, & D with expected returns respectively as 20%, 10%, 12%, & 9%. You invest Rs.40000/-. Under what circumstances would you recommend buying the share___

a. If the company is expected to distribute its large reserves in the near future. b. If the company is coming out with a fresh issue to finance its expansion. c. If the company is taking efforts to cut down its expenses d. None.

2(Answer- None-d)

72. Fund Avg Return std deviation beta a. 20 25 1.3 b. 12 16 0.9 c. 15 19 1.1 Market 10 15 1 Risk free rate = 6%

Rank the funds based on Jenson Measure in order of best to worst. 1. CBA 2. ACB 3. ABC 4. BAC

(Answer- ACB-b) 2

Ignore tax & transaction cost. Each contract is equal to 100 shares.

shares Current price

Exercise price

*Call premium *Put premium

3 months

6months 3 months

6months

A 52 50 3 4 0.35 1.05 B 40 45 1 1.25 5.5 6 C 35 30 6 6.3 0.45 0.65

* Stands for time to maturity

73 If B’s price is Rs.35, at the maturity, of 6 months option. Determine the value of five 6 months Put contracts at their maturity date.

a. 8200 b. 2000 c. -4000 d. 5700

2(Answer- 2000-b) 74. The sponsor of a mutual fund may be compared to _____

a. A director in a company b. The chief executive of a company c. The promoter of a company d. An equity share holder of a company

2(Answer- The promoter of a company-c) 75. Mutual funds in India are set up as a ____

a. Company b. Trust c. Partnership d. Association of persons 1

(Answer- Trust-b) 76. The asset management company is appointed by____

a. SEBI b. Unit holders c. Sponsor d. Trustee

1(Answer- Trustee-d) 77. Mutual Funds are regulated by___

a. RBI b. AMFI c. SEBI d. NSE

2

(Answer- SEBI-c) 78. Which of the following qualifies as a self regulatory organization?

a. SEBI b. RBI c. NSE d. AMFI

2(Answer- NSE-c) 79. An NRI holds units in a mutual fund. What should he do with his holding if he takes

up a foreign citizenship? a. He redeems b. He continues c. He transfers the units to his mother, who resides in India. d. None of the above.

(Answer-He redeems-A) 2 80. A close end equity fund has average weekly net assets of Rs. 200 crores. As per

SEBI Regulations, the AMC can charge the fund with investment and advisory fees up to____.

a. Rs. 2.25 crores b. Rs. 2 crores c. Rs. 2.5 crores d. Rs. 3 crores

1(Answer- 2.25 crores-a) Working: 1.25% of 1st 100 crores, & then 1% of the balance. 81. The current market price of a 9% coupon bond, when other bonds of similar

maturities pay 11%, will be: a. Above par b. Below par c. At par d. Will be unrelated to other bonds

(Answer- Below par-b) 2 82. Yield and price of a bond move in ____

a. Opposite direction b. Together in the same direction c. In an unrelated fashion d. In line with the inflation index 1

(Answer- Opposite direction-a) 83. A unit of an open ended was purchased when its NAV was Rs. 20. At year end its NAV was Rs. 22. In the interim period, the fund made a distribution of Rs. 4 per unit when its NAV was Rs. 21. What was the simple total return of the fund?

a. 25% b. 30% c. 20% d. 31%

4(Answer- 30%-b)

84. What type of portfolio asset mix would you recommend to your 55 year old client who plans to retire at age 58? Choose a portfolio that is the closest match to the investor’s needs.

a. 40% in Equity Schemes & 60% in Balanced funds b. 40% in Equity Schemes & 60% in Debt funds. c. 20% in equity schemes, 20% in liquid funds & 60% in Debt funds. d. 100% in Monthly Income Schemes.

2Solution: C

85. Rajiv buys a growth – oriented non dividend paying share for Rs. 200 and 4 years later you sell it for Rs. 350. The CAGR is____

a. 10.3% b. 18.8% c. 75% d. 15%

2(Answer-15%-d) Working ((350/200) ^ (1/4)) -1 x100 = 15%

86. Rakesh has a portfolio with 23 different equities. The portfolio increased by 20%, beta of 1.50. utilizing the Capital Asset pricing Model compute by what % did the market change?

a. 14% b. 15% c. 17% d. 16.5%

4(Answer-15%-b) Working: 20 = 5 + (Rm -5) 1.5 20 – 5 = 1.5 Rm – 7.5 15 + 7.5 = 1.5 Rm Rm = 22.5/ 1.5 = 15%

87. Prakash owns a let out house property the net annual value of which is Rs. 200000/- The standard deduction under Sec.24 that is available to him in respect of the above income would work out to ___

a. 20000 b. Nil c. 40000 d. 60000

1(Answer-60000-d) Std deduction 30% of Net annual value = 30% x 200000 = 60000/- 88. Any possible occurrence which may have a negative implication can be plotted on a

graph with X axis measuring the frequency (low – high) and Y axis measuring the financial impact (low – high). It would not be practical to purchase insurance for events which fall in the high frequency, high impact quadrant because______

a. Such a risk cover would be very expensive b. The best way to cover such a risk would be to alter the functioning of the

business c. Usually this is a business risk, which is rewarded by profit motive d. Such occurrences are so few that no insurer would be offering a risk cover.

(Answer- a) 2 89. Can an NRI extend his old PPF account for 5 years after its maturity?

a. Yes b. No c. Not specified d. Can’t say

1(Answer-no-b) 90. The statement “Members shall ensure their conduct does not bring discredit to the

Financial Planning Profession’, relates to the FPSB code of Ethics of ___ a. Compliance b. Professionalism c. Fairness d. Integrity 2

(Answer- Professionalism-b)

91 If return on equity is 18% and on Fixed Income Security is 8%. Your client folio

comprises investment 70% in equity and 30% in fixed income. Calculate Total return on the folio.

a) 15%

b) 14.5%c) 18%d) 17%

4(Answer – 15%-a)

92 Based on scenarios below, what is the expected return for a portfolio with the following return profile?

BEAR NORMAL BULL

Probability 0.2 0.3 0.5Rate of Return -25% 10% 24%

a) 12%b) 11%c) 10%d) 9%

2(Answer- 10%-c)

93 Calculate expected rate of return for M/S X Ltd. RATE OF RETURN PROBABILITY-10% 0.10-20% 0.2520% 0.3050% 0.2530% 0.10

a) 14.5%b) 13.8%c) 15.8%d) 15.5%

(Answer- 15.5%-d) 4

94 Determine the Expected return on the following

SECURITIES NO. OF SHARE COST PRICE SELLING PRICEA 200 100 140B 150 75 78C 300 125 140D 100 65 95

What is return on security A, B, C?

a) 40%,4%,12%

b) 12%,4%,40%c) 4%,12%, 40%d) None of the above

4(Answer- a)

95What is return on the portfolio?a) 20.15%b) 21.196%c) 22.00%d) 23.21% 2

(Answer- 21.196%-b)

a) Calculate for security X and Y on the data given below

Probability Security X Security Y0.1 40 400.2 20 300.4 0 150.2 -5 00.1 -10 -20

1 Calculate Standard deviation of X and Y?a) 14.798 and 16.552b) 15.226 and 17.789c) 14.798 and 15.567d) None of the above 4

(Ans- X= 14.798, Y= 16.552- a)

2 Calculate Covariance? a) 214.00b) 234.56c) 215.96d) None of the above

(Answer- 215.96-c) 4 b) Unique risk of a security is diversifiable?

a) Trueb) False

2(Answer- True-a)

c) Market risk can also be called Unsystematic risk?a) Trueb) False

(Answer-False-b) 1

d) ABC Company paid dividend of Rs5.40 during the year 2007. Amit bought a share at 61.20 at the beginning of the year. Sold it at 72.40 at the end of the year. Find Total Return? a) 25.65%b) 22.45%c) 27.12%d) None of the above

(Ans- 27.12%- c) 4

e) During last 10 days price of a share is traded at following rate-Rs152, 145,150,151,147,155,153,149,148,150Calculate Standard Deviation.

a) 2.9439b) 2.6789c) 2.4567d) 3.0000

4(Ans- 2.9439-a)

f) You are thinking to buy Some Share of Infosys. The rate of return expected is as follows-

Return Probability7% 0.1010% 0.5011% 0.209% 0.10

Compute expected return on investment?a) 8.9%b) 9.0%c) 9.5%d) None of the above 4

(Ans- 9.5%-c)

g) Ram invested 10000/- in a mutual fund. Get dividend of Rs.2578 and after a year sold it at 11598/- Calculate Compounded annual growth rate?

a) 41.00%b) 43.00%c) 41.76%

d) None of the above 4 (Ans- 41.76%-c)

103 Calculate Holding period return and Compounded annual growth rate for following investment- Initial Investment-150000/- Dividend for Ist Year- 20000/- Dividend for IInd Year – 25000/- Sold after 2 year at 170000/-

a) 45.89%b) 43.33%c) 42.34%d) None of the above 2

(Ans- 43.33%-b)

104 It calls for increasing exposure to stock when the portfolio appreciate in valueBuy & Hold policyConstant mix policyCPPINone 1

(Answer is CPPI- c)

105 It calls for maintaining the proportion of stock and bonds in line with their target value

a) Drifting asset allocationb) Balanced asset allocationc) Dynamic asset allocationd) None

(Answer is Balanced asset allocation-b) 1

106It calls for selling stocks as they fall and buying stocks as they risea) Buy and hold policyb) Constant mix policyc) CPPId) None

2(Answer is CPPI-c)

107__________ is the appropriate mean because investments that has uncertain returns will have a higher expected terminal value than an investment that earn its compound return with certainty every year.

Arithmetic meanGeometric mean

(Answer is Arithmetic mean-a) 1

108 It perform well in flat but fluctuating marketDrifting asset allocationBalanced asset allocationDynamic asset allocationNone

1(Answer Balanced asset allocation-b)

109 The standard deviations of the returns of a portfolio of securities will be_______ the weighted average of the standard deviation of return of the individual component securities.

a) Equal tob) Less thanc) Greater thand) Less than or equal to (depending upon the correlation between securities)

(Answer- d) 2

110Modern asset allocation is based upon the model developed by Harry Markowitz. Which of the following statement is/are correctly identified with this model.

a) The risk, return and covariance of asset are important input variables in creating portfoliosb) Negatively correlated assets are necessary to reduce the risk of portfoliosc) In creating a portfolio, diversifying within an asset typed) The effective frontier is relatively insensitive to input variable.

A) a & b onlyB) a, b, c onlyC) a onlyD) a, b, d only

2(Answer a only- c)

111Which of the following statements about investment risk is correcte) Beta is a measure of systematic, non diversifiable riskf) Rational investors will form portfolios and eliminate systematic riskg) Rational investors will form portfolios and eliminate unsystematic riskh) Systematic risk is the relevant risk for a well diversified portfolioi) Beta capture all the risk inherent in individual security

A) a, b, e onlyB) a, c, d onlyC) b, e onlyD) b, c, d only

(Answer- b) 4

112The unique risk of a security is diversifiable.a) Trueb) False

(Answer- False-b) 1

113Market risk can also be called unsystematic risk.a) Trueb) False

(Answer- False-b) 1

114Stock A and B are positively correlated with the correlation coefficient of 0.75. When Stock A move up by 12%, How will stock will perform?

j) Stock B will move up by 12%k) Stock B will move down by 12%l) Stock B will move up by 9%m) Stock B will move down by 12%

(Answer-c) 2

115Beta captures all the inherent risk in an individual security.a) Trueb) False

(Answer- False-b) 1

116Unsystematic risk is reduced in a portfolio because securities are not perfectly correlated.

a) Trueb) False

1(Answer-True-a)

117As Beta increase, the expected return also increases.

a) Trueb) False

1(Answer- True- a)

118Rational investors will form portfolios to eliminate systematic risk.

a) Trueb) False

(Answer- False-b) 1

119 For calculating portfolio risk, we need information of which of the following things

a) The weight of each security in the portfolios.b) The co-movements b/w the different securities measured by co-variancec) Both A and Bd) None of the above

(Answer –b) 2120 As the risk in portfolio is largely determined by co-variance of different securities in the portfolio, the portfolio risk can be reduced when the securities are less than perfectly positively correlated

TrueFalse

(Answer-False-b) 2

121 What is market risk premium?It is the premium available in the marketIt is the market risk measured by premium paidIt is the difference between the average return on the portfolio and average

risk free rate All of the above

2(Answer- c)

122 Total risk comprises of::a) Market riskb) Systematic risk + Unsystematic riskc) Political Riskd) Inflation risk 4

(Answer –Systematic + Unsystematic) – b)

123 Which of the above mentioned can be reduced after appropriate diversification?Market riskCompany specific riskPolitical RiskInflation 2

(Answer- Company specific risk-b)

124 When you want to know the average compound rate of growth that has actually occurred over multiple periods, the________ mean is not appropriate

Geometric meanArithmetic mean

Cumulative wealth indexHolding period return 2

(Answer- Arithmetic mean-b) 125___________ Measure the level of wealth rather than the change in level of wealth.

Geometric meanArithmetic meanCumulative wealth indexHolding period return 1

(Answer- Cumulative wealth index- c)

126 If an asset’s return has no variability, it is Risk free security.TrueFalse 1

(Answer- True-a)

127 _Risk Premium _ may be defined as the additional return investors expect to get for assuming additional risk.

a) Trueb) False

2(Answer- True- a)

128 If an outcome is certain to occur it is assigned a probability of 1____ while an impossible out come is assigned a probability of __0____

TrueFalse

(Answer- True-a) 2

129 Investment decision involves tradeoff between __Risk____ and Return ________TrueFalse

(Answer –True-a) 1

130 Holding period return is equal to compounded annual growth rate for investment period more then 1 year.

TrueFalse 1

(Answer- false-b)

131 Real rate of return is a ___________ adjusted return.a) Inflationb) Taxc) Both a and bd) None of the above

(Answer- Inflation- a) 2

132 The process of investing money as well as reinvesting the interest earned thereon is called as Compounding

TrueFalse

1(Answer- True-a) 133 Effective interest rate and stated annual interest rate is one and the same.

TrueFalse

1(Answer-False- b)

134 Risk of a portfolio is measured by-

a) Covarianceb) Expected returnc) Varianced) None of the above 2

(Answer- Variance-c)

135 Portfolio risk is not the weighted average of the risk of the individual securities when the returns from the securities are uncorrelated.

a) Trueb) False

(Answer- False-b) 1

136 A portfolio is efficient if there is no alternative witha) The same expected return and a lower standard deviationb) The same risk and higher returnc) Higher expected return and low riskd) None of the abovee) All of the above

(Answer- All of the above-e) 2

137 The efficient frontier is the same for all the investor because portfolio theory is based on the assumption that investors have homogeneous expectation.

a) Above statement is trueb) Above statement is Falsec) Above statement is true up to an extent

(Answer- true-a) 1 138 As the number of securities in a portfolio increases-

a) risk of portfolio increasesb) risk of each security decreasesc) significance of covariance relationship increases

d) market risk get diversified

A) a is trueB) b,c,d is trueC) b,c is trueD) all are trueE) none of above 4

(Answer- b, c is true- c) 139 Correlation coefficient reflects the _______________ between two securities.

a) Relation b) Covariance c) None of the above

1(Answer- covariance-b)

140 As the investment period lengthens, the average yearly return over the period is

subject to lesser volatility because low returns in some years may be offset by higher return in other years and vice versa.

a) Trueb) False

1(Answer-True-a)