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You are on page 1of 84

Planning

(Workbook)

E-Block, 6th Floor,

NCL Bandra Premises,

Bandra Kurla Complex,

Bandra (E). Mumbai 400 051

Tel No: +91 22 66680005

Fax No: +91 22 66680006

Email: help.fp@imsindia.com

Website:www.imsindia.com

PREFACE

Having gained conceptual clarity through concept book and in-class experience, it is

important that you apply and strengthen your fundamentals; the exercises in the

workbook will offer you practice and challenge your ability and understanding.

The questions have been designed in such a way that each test covers all the concepts

discussed in the book.

The Tests will help you identify your conceptual gap; assess your strengths and

areas for improvement.

In addition to these workbooks, you can also access more practice tests online. For

details write to us at help.fp@imsindia.com

Investment Planning

Workbook

1.

which one of the following statements?

6.

b) It is the dealer's gross income from a

transaction.

c) It is larger for illiquid securities than it is

for liquid securities.

d) All of the above are true.

e) None of the above.

2.

3.

8.

a)

b)

c)

d)

Workbook

It receives no cash dividends.

It may be resold at any time.

All of the above.

correctly defines the dividend yield (y) from

a share of common stock?

a) y = (purchase price) + (cash dividend, if

any) / purchase price

b) y = (price change) + (cash dividend, if

any) / purchase price

c) y = price change /purchase price

d) y = cash dividend (if any) / purchase

price

One percentage point, 1 percent

One paisa, Re.0.01

One one-hundredth of one percentage

point, 0.01 of 1 percent,

describes a Government bond?

over common stockholders with respect to

which of the following?

a) Dividends cannot be paid to common

stockholders unless the preference

stockholders receive their stated

dividend.

b) In the event of bankruptcy and liquidation,

the preference shareholders are paid

before the common shareholders.

c) Preference shareholders get to elect the

Chairman of the corporation's Board of

Directors.

d) Both (a) and (b) are true, but (c) is false.

e) All of the above are true.

a)

b)

c)

d)

5.

7.

of money market securities?

a) They are issued by the Government,

municipalities and large corporations

that have high-quality ratings.

b) All have terms to maturity that are 270

days or less.

c) All tend to have large amounts of

purchasing power risk.

d) Both (a) and (b)

e) Both (b) and (c)

4.

a corporation in which they are a

shareholder and thus gain access to its

books.

b) They can vot e for the common

shareholders' dividend.

c) They can vote for the preference

shareholders' dividend.

d) All of the above.

investors?

a) Coupon interest.

b) Possible price appreciation above their

discounted price.

c) T-bills pay no interest.

d) Difference between discount price and

face value.

shareholders have?

9.

a)

b)

c)

d)

e)

Investment Planning

is a marketable security

is a debt security

both (a) and (b)

all of the above

10.

be converted into common share at the

option of the investor any time and at a

conversion ratio that never changes.

b) Some issues of preference share may

be converted into common share at the

option of the investor within a limited

number of years after the preferred stock

is issued.

c) Some issues of preference share may

be converted into common share at the

option of the investor only after a

specified number of years have elapsed

since the preference share was initially

issued,

d) All of the above are true.

e) Preference share is never a convertible

security.

11.

issue are primarily determined by which of

the following?

a) The level and trend of the issuer's

financial ratios

b) The level and structure of interest rates

c) The issuer's financial condition and the

indenture contract that governs the

issuing firm

d) All the above

13.

14.

a higher yield-to-maturity than another AAgrade bond issued at a different time by the

same corporation because of which of the

following reasons?

a) Bonds with longer maturities normally

pay higher rates of interest than similar

bonds that have shorter maturities.

b) The bond market is sometimes irrational

and evaluates the riskiness of some

bond issues erroneously.

applies to default-free bonds?

a)

b)

c)

d)

15.

AAA.

AA.

Both b and a are default-free.

None of the above is default-free.

that was promised when the security was

purchased if the following conditions

occurs?

a) The issuer defaults on either the interest

or principal payments.

b) The investor sells the security prior to

its maturity date.

c) Cash flows from the security paid to the

investor prior to its maturity date are held

in cash or spent on consumption goods

rather than reinvested.

d) All of the above are true.

e) None of the above are true.

describes corporate bonds?

a) Bond investors are creditors of the

corporation.

b) All the bonds make coupon interest

payments once per annum.

c) Both (a) and (b) are true.

d) None of the above are true.

12.

whereas the other issue is unsecured.

d) All of the above

describes the convertibility of preference

share?

16.

investment management strategy.

a) True

b) False

17.

the following?

a) A mutual fund constructed to achieve a

particular investment goal.

b) A portfolio that attempts to match the

performance of some stock market index

by investing in the same stocks and in

the same proportions as those that

comprise the selected market index.

c) Both of the above.

d) An investment portfolio that appreciates

in value at least as rapidly as some

inflation index (such as the Consumer

Price Index, for instance).

e) Both (a) and (d).

Investment Planning

Workbook

18.

The weights used in constructing a valueweighted stock market index are best

described by which of the f ollowing

statements?

a) Equal weights are assigned to every

security in the index.

b) The weight assigned to each stock is

proportionate to its price per share.

c) The share price of every stock in the

index is multiplied by the number of

shares outstanding to determine the

weight of that issue based on its total

value stated as a proportion of the

aggregate market value of all the stocks

in the index.

d) The weight assigned to each stock in the

index is proportional to the number of

shares that issue has outstanding stated

as a proportion of the aggregate number

of shares outstanding for all issues that

comprise the index.

e) Both (a) and (d) are true.

19.

21.

23.

24.

a) True

b) False

Workbook

outstanding its book value per share equals

its total net worth divided by the number of

shares of common stock plus preference

shares it has outstanding.

a) True

b) False

25.

as a firm uses more financial leverage?

a)

b)

c)

d)

e)

26.

The debt-to-equity ratio

The inventory turnover

Both (a) and (b)

Both (a) and (c)

increase the growth rate of a corporation?

a)

b)

c)

d)

e)

27.

does not affect the equity capital shown in

its balance sheet in any way.

the percent of the corporation's earnings

paid out for cash dividends.

a) True

b) False

a firm's net profit in order to determine how

much cash flow the firm generated.

a) True

b) False

increase bot h sides of the issuing

company's balance sheet by the same

amount.

a) True

b) False

accurately characterized by which of the

following statements about the degree to

which they covary together?

a) They are perfectly positively correlated.

b) They are highly positively correlated.

c) They are uncorrelated.

d) They are negatively correlated.

e) It is impossible to generalize, some are

highly positively correlated and some are

negatively correlated.

20.

22.

External borrowing

Increasing the retention rate

Increasing the rate of return on equity

Both (a) and (b)

All of the above

has 700,000 in long-t erm debt. If

stockholders' equity is 900,000, what is its

total debt to total asset ratio?

a)

b)

c)

d)

e)

Investment Planning

45

47

59

52

55

percent

percent

percent

percent

percent

28.

ratio of .4, total debt of Rs.200,000, and net

income of Rs.30,000. Determine the

corporation's return on equity.

a)

b)

c)

d)

e)

29.

30.

quantities sold short and bought long are

out of balance, or the purchase and short

sale prices differ.

a) True

b) False

Speculating

Hedging

Arbitrage

All the above

described by which of the f ollowing

statements?

a) Having long positions indicates that the

buyer is bullish.

b) Uncovered short sellers expect the

market to be bearish.

c) Hedgers are always bullish.

d) Both (a) and (b) are false

e) All of the above are false

An increase in inventory

An increase in accounts receivable

An increase in investments

An increase in accounts payable

None of the above

the rates of return from these two cement

sector shares, say, A and G was +0.9. If

you took a long position in G and a short

position in A (or vice versa) of exactly equal

value you would be perfectly hedged.

the following activities?

a)

b)

c)

d)

35.

a) True

b) False

32.

34.

a)

b)

c)

d)

e)

31.

Rs.75

Rs.100

Rs.110

Rs.115

Rs.117

describes a speculator's (short seller)

profits?

a) The per share profit is limited to an

amount equal to the price at which the

shares were sold short.

b) The short seller earns Re.1 profit for

every Re.1 fall in price of the security.

c) Short selling can help arbitragers earn

profits.

d) All the above are true.

8 percent

9 percent

10 percent

12 percent

14 percent

Stockholders' Equity = Rs.2,000; Shares

Outstanding = 40; Market Price to book

value = 2. Determine the market price for

the firm's common stock.

a)

b)

c)

d)

e)

33.

36.

news about decline in a company's earnings

per share is reported?

a) Because a reduction in a earnings

means that the firm has less money with

which to pay dividends and therefore the

market f ears a reduction in the

company's future dividends.

b) Because the share market anticipates

that a decreased level of earning power

might be the indicator of default and

perhaps even bankruptcy.

c) The statement is false. Share prices do

not usually react to announcements

about current earnings.

d) Both (a) and (b) are true.

Investment Planning

Workbook

37.

following statements?

40.

from one bond issue to the next

b) Fluctuations in the market prices of

bonds as their prices move inversely to

the prevailing market interest rates

c) The variability of returns as a result of

fluctuations in market interest rates

d) Both (a) and (b)

e) All of the above

38.

and one of your clients, on your advice,

invested Rs.100,000 in Treasury bonds due

to mature in 2 years. If your client becomes

worried that a general increase in the level

of interest rates will reduce the market value

of his bond portfolio, what should you say

to allay your client's fears?

a) You could assuage your client's fears by

claiming you foresee only stable interest

rates ahead.

b) You could instruct your client to liquidate

their portfolio of Treasury bonds and

reinvest the proceeds in a bank.

c) Both (a) and (b) are true.

d) You could tell your client not to worry

because the market prices of short-term

bonds do not fluctuate very much.

39.

one of your clients reads something about

interest-rate risk and is worried that if market

interest rates declined his coupon interest

income will likewise decline. His bond

investments have maturities ranging from

15 to 30 years. What advice is appropriate

for this client?

a) Tell the investor to liquidate her couponpaying bonds and reinvest the money in

zero coupon bonds.

b) Tell your client not to worry, her coupon

income will not vary until her coupon

bonds mature in 15 to 30 years.

c) Both (a) and (b) are true.

d) The client need not worry if market

interest rates are expected to rise

because coupon rates vary inversely

with market interest rates and therefore

her coupon interest could increase.

e) All the above are true.

Workbook

E(r), from the probability distribution of

returns below for the ABC common share.

one of the following?

a)

b)

c)

d)

e)

41.

The E(r) is 20 percent.

The E(r) is 5 percent.

The E(r) is 10 percent.

The E(r) is 12 percent.

describes the phrase 'risk'?

a) The phrase total risk is synonymous with

the variability of return from an asset.

b) Bond quality ratings essentially measure

the probability that an issue of bonds falls

into default.

c) Although Treasury bonds are free from

default risk they nevertheless contain

substantial amounts of interest-rate risk.

d) Both (a) and (b) are true.

e) All the above are true.

42.

current dividend of Rs.3.85 per share, which

is growing at a 7 percent rate per year,

determine its required return?

a)

b)

c)

d)

e)

Investment Planning

16.2 percent

15.1 percent

16.6 percent

17.3 percent

18.2 percent

43.

which is growing at a 7 percent rate per year

and is expected to grow at the same rate in

future. Its required rate of return is 14.5%

Determine its share value.

a)

b)

c)

d)

e)

44.

48.

Rs.51.33

Rs.55.08

Rs.57.02

Rs.52.05

Rs.50.75

49.

the volatility (or risks) of the underlying asset

increases.

expecting the value of the underlying asset

to increase.

a) True

b) False

51.

Rs.1,000

Rs.1,500

-Rs.2,000

-Rs.4,000

-Rs.500

C, what would your profit "or loss position

have been at maturity if the share's price

was Rs.32?

a)

b)

c)

d)

e)

information given in the table below to answer the

questions. Ignore taxes and transaction costs.

Rs.2,000

Rs.5,700

Rs.8,200

Rs.4,000

Rs.3,600

options of C and the price of C's share is

Rs.32 at maturity. Determine your profit or

loss on the investment.

a)

b)

c)

d)

e)

50.

Rs.200

Rs.400

-Rs.460

Rs.500

Rs.560

If B's price is Rs.35 at the maturity of the 6month option, determine the value of

purchase of five 6-month put contracts at

their maturity date.

a)

b)

c)

d)

e)

a) True

b) False

46.

on A, what profit or loss will you make on

the maturity date if the price of A at that

time is Rs.57?

a)

b)

c)

d)

e)

of Rs.6. Assume a dividend-payout ratio of

55 percent. Earnings grow at a rate of 8.5

percent per year. If the required rate of

return is 15 percent, what is its current

value?

a)

b)

c)

d)

e)

45.

Rs. 52.48

Rs. 49.25

Rs. 54.93

Rs. 55.75

Rs. 47.26

47.

-Rs.225

-Rs.400

-Rs.600

Rs.400

Rs.600

on B's share. What is his profit or loss on

the options at maturity if the price of B at

that time is Rs.43?

a)

b)

c)

d)

e)

Investment Planning

Rs.625

-Rs.600

Rs.400

Rs.300

Rs.200

Workbook

52.

options on B, what would his profit or loss

have been at the maturity of the options if

the share price was Rs.43 per share?

a)

b)

c)

d)

e)

53.

58.

put is usually better than selling short because

a) The holder's losses can be no more than

the put premium if the share price rises,

but the short seller's losses could be

unlimited in this situation.

b) The short sale will become worthless

after a short period of time but the put

will not become worthless.

c) The short seller must pay any dividends

paid by the security the short seller

borrowed.

d) (a) and (b).

e) None of the above

55.

to increase when :

a) The price of the underlying asset

decreases.

b) The volatility of the underlying asset

decreases.

c) The time to maturity of the option

increases.

d) Both (a) and (b).

e) None of the above.

56.

share tends to lower the value of a call

option on the firm's equity.

a) True

b) False

59.

B's 6-month put

C's 6-month put

a and b

None of the above

in the Black Scholes model, the value of a

put decreases.

a) True

b) False

money?

a)

b)

c)

d)

e)

54.

Rs.1,000

Rs.2,000

Rs.1,800

Rs.1,500

-Rs.500

57.

Black Scholes model are not very sensitive

to changes in the asset's standard deviation

of returns.

a) True

b) False

60.

binomial model will approach those

calculated with the Black Scholes model for

a given period of time as we divide the fixed

time period into smaller and smaller units.

a) True

b) False

information given below, answer the questions with

the Black Scholes option pricing model.

The options on the share of National Corporation

have the following values:

S = Rs.55 k = Rs.52 R = .10 u = .33 and T = .4

Assume that no dividends are currently being paid.

61.

Corporation?

a)

b)

c)

d)

e)

Rs.6.50

Rs.6.80

Rs.7.33

Rs.8.05

Rs.8.35

determine the overall market value of a firm.

a) True

b) False

Workbook

Investment Planning

62.

should an investor follow?

a) Buy 1,000 calls, sell short 733 shares of

National share.

b) Buy 1,000 calls, sell short 600 shares of

National share.

c) Buy 500 shares of National, sell 1,000

calls.

d) Buy 714 shares of National, sell 1,000

calls.

e) Buy 600 shares of National, sell 1,000

calls.

63.

Rs.1.75

Rs.2.29

Rs.2.65

Rs.2.95

Rs.3.15

65.

71.

share with a 4 percent annual dividend.

a)

b)

c)

d)

e)

10

Rs.5.57

Rs.5.85

Rs.6.03

Rs.6.35

Rs.6.74

Rs.2.56

Rs.2.85

Rs.1.95

Rs.2.40

Rs.2.96

Rs.1.50

Rs.1.75

Rs.1.91

Rs.2.51

Rs.2.30

on National's share if the other inputs do

not change. Assume no dividends.

a)

b)

c)

d)

e)

dividends at the rate of 4 percent per year.

Determine the price of a call.

Rs.6.80

Rs.7.25

Rs.7.61

Rs.7.90

Rs.8.10

National's share if the other inputs do not

change. Assume no dividends.

a)

b)

c)

d)

e)

70.

.37

.40

.25

.35

.18

call on National's share if the other inputs

do not change. Assume no dividends.

a)

b)

c)

d)

e)

what should an investor do?

a)

b)

c)

d)

e)

66.

68.

69.

b) Buy 1,000 puts for every 300 shares

purchased.

c) Sell 1,000 puts for every 229 shares sold.

d) Sell 1,000 puts for every 350 shares

purchased.

e) Buy 1,000 puts for every 400 shares

sold.

determine the implied standard deviation of

returns without dividends.

a)

b)

c)

d)

e)

share.

a)

b)

c)

d)

e)

64.

67.

Rs.5.86

Rs.6.19

Rs.6.30

Rs.6.42

Rs.6.76

coefficient between the two assets is

reduced, the portfolio's risk is reduced.

a) True

b) False

72.

covariance terms.

a)

b)

c)

d)

Investment Planning

2499

1449

1225

none of the above

Workbook

73.

possibilities are nonlinear when the

correlation between the asset returns is less

than + 1.

77.

a)

b)

c)

d)

e)

a) True

b) False

Directions for questions 74 and 75: Refer to the

data below.

a)

b)

c)

d)

e)

75.

220.32

-420.11

145.22

270.36

162.08

78.

above information.

a)

b)

c)

d)

e)

.540

.869

.923

.758

.697

79.

l

l

l

76.

percent M and 75 percent N.

a)

b)

c)

d)

e)

Workbook

18.25 percent

30.15 percent

24.15 percent

21.75 percent

27.13 percent

80.

0.63

.68

.91

1.05

1.10

for the XYZ Fund for the 5-year period.

a)

b)

c)

d)

e)

and return statistics:

Standard deviation (M) = 18%;

Standard deviation (N) = 30%

Expected Return (M) = 14%; Expected

Return (N) = 19%

Correlation coefficient = 0.28

for the ABC Fund for the 5-year period.

a)

b)

c)

d)

e)

data below :

19.5 percent

21.7 percent

17.8 percent

23.0 percent

25.4 percent

information in the table below to answer the

questions. Assume the risk less rate is the average

of the five annual T-bill returns.

74.

50% N from the information given in

problem 81.

.48

0.34

.78

.92

1.05

measure (alpha) for the ABC Fund over the

5-year period.

a)

b)

c)

d)

e)

Investment Planning

4.27

2.69

1.76

2.01

3.76

11

81.

its term to maturity.

90.

a) True

b) False

82.

83.

a)

b)

c)

d)

e)

volatile in terms of price than short-term

bonds for a given change in interest rates.

a) True

b) False

91.

bond's coupon.

less than its term to maturity.

92.

a) True

b) False

85.

a) True

b) False

86.

93.

bond's coupon and duration.

87.

are held constant, its duration decreases.

a) True

b) False

88.

exceeds the coupon rate.

a) True

b) False

89.

the bond's price is less than par value.

94.

The bond's interest-rate risk

Both a and b above

The default risk of the bond issue

None of the above

a)

b)

c)

d)

e)

a) True

b) False

Rs.1,130.55

Rs.935

Rs.757

Rs.868

Rs.898.94

the following?

a)

b)

c)

d)

e)

movements that result from an equal

absolute decrease or increase in the yieldto-maturity are symmetrical.

Rs.1,051.65

Rs.1,159.88

Rs.885.30

Rs.888.89

Rs.955.41

2 years, assuming everything else stays the

same, is (Hint:There will be 8 years until

maturity.)

a)

b)

c)

d)

e)

a) True

b) False

84.

12 percent and 10 years to maturity has a

price equal to ____________.

Decrease in value

Experience a decrease in duration

Experience an increase in duration

None of the above

Both a and b above

a) Refers to the problem of being able to

purchase another bond with the same

or higher YTM when the existing bond

matures or is called.

b) Is the risk of not being able to reinvest

the coupons of a bond at the bond's

YTM.

c) Is the same as marketability risk.

d) Both (a) and (b).

e) None of the above.

a) True

b) False

12

Investment Planning

Workbook

95.

which of the following investments should

you choose?

a)

b)

c)

d)

e)

96.

Low-coupon short-term bond

High-coupon short-term bond

Long-term zero coupon bond

Short-term zero coupon bond

being the same,

a) have more interest-rate risk than bonds

with smaller coupons

b) have less interest-rate risk than bonds

with smaller coupons

c) have higher duration than smallercoupon bonds

d) have lower duration than smaller-coupon

bonds

e) Both (b) and (d)

97.

common stock portfolio expresses concern

about a possible market decline. However,

he/she does not want to incur the cost of

selling a part of their holdings nor the risk

of mistiming the market. A possible strategy

for him/her would be

a)

b)

c)

d)

e)

98.

Sell an index call option.

Buy an index put option.

Sell an index put option.

He cannot protect against the decline

with these options.

over the evaluation period and the

benchmark portfolio yielded a return of 17%

over the same period. Over the evaluation

period, the standard deviation of returns

from the fund was 23% and the standard

deviation of returns from the benchmark

portfolio was 21%. Assuming a risk-free rate

of return of 8%, which one of the following

is the calculation of the Sharpe index of

performance for the fund over the evaluation

period?

a)

b)

c)

d)

e)

Workbook

.3913

.4286

.4783

.5238

.5870

99.

portfolio of securities will be ____________

the weighted average of the standard

deviation of returns of the individual

component securities.

a)

b)

c)

d)

Equal to.

Less than.

Greater than.

Less than or equal to (depending upon

the correlation between securities).

e) Less than, equal to, or greater than

(depending upon the correlat ion

between securities).

100. According to fundamental analysis, which

phrase best defines the intrinsic value of a

share of common stock?

a) The par value of the common stock.

b) The book value of the common stock.

c) The liquidating value of the firm on a per

share basis.

d) The stock's current price in an inefficient

market.

e) The discounted value of all future

dividends.

101. A call option with a strike price of 110 is

selling for 3 when the market price of the

underlying stock is 108. The intrinsic value

of the call is:

a)

b)

c)

d)

e)

0.

1.

2.

3.

(2).

Model, the Arbitrage Pricing Theory (APT):

a) Is usually a multi-factor model.

b) Is primarily using by arbitrageurs to profit

from imperfections in security markets.

c) Assumes a market portfolio.

d) Is a useful technical indicator.

103. With the same rupee investment, which of

the following strategies can cause the

investor to experience the greatest loss?

a)

b)

c)

d)

e)

Investment Planning

Selling a naked call option.

Writing a covered call.

Buying a call option.

Buying the underlying security.

13

the value of common stock (everything else

being equal) would:

a) Not change because this does not affect

stock values.

b) Increase in order to compensate the

investor for increased risk.

c) Increase due to higher risk-free rates.

d) Decrease in order to compensate the

investor for increased risk

e) Decrease due to lower risk-free rates.

105. The current annual dividend of ABC

Corporation is Rs.2.00 per share. Five

years ago the dividend was Rs.1.36 per

share. The firm expects dividends to grow

in the future at the same compound annual

rate as they grew during the past five years.

The required rate of return on the firm's

common stock is 12%. The expected return

on the market portfolio is 14%. What is the

value of a share of common stock of ABC

Corporation using the constant dividend

growth model? (Round to the nearest rupee)

a)

b)

c)

d)

e)

Rs.11.

Rs.17.

Rs.25.

Rs.36.

Rs.54.

Standard deviation.

Variance.

Correlation coefficient.

Coefficient of variation.

Beta.

a)

b)

c)

d)

e)

5; 1.

1; 3.

1; 4.

1; 5.

2; 5.

14

1, 2, and 3 only.

1 and 3 only.

2 and 3 only.

4 only.

1, 3, and 4 only.

risks?

1

2

3

4

5

6

Business risk.

Management risk.

Company or industry risk.

Market risk.

Interest rate risk.

Purchasing power risk.

a)

b)

c)

d)

e)

4,

1,

5,

1,

4,

5, and 6 only.

2, and 3 only.

6, and 2 only.

3, and 4 only.

and 6 only.

1

2

3

4

Eliminate currency risk.

Sell U.S. securities in overseas markets.

Trade foreign securities in U.S. markets.

a)

b)

c)

d)

e)

1 and 3 only.

1 and 4 only.

2 and 4 only.

4 only.

1, 2, and 4 only.

statements about bond swaps is true?

maturing in exactly 10 years bears a coupon

rate of 8% compounded annually and a

market price of Rs.1147.20. The indenture

agreement provides that the bond may be

called after five years at Rs. 1,050. Which

of the following statements is/are true?

1 The yield to maturity is 6%.

2 The yield to call is 5.45%.

a)

b)

c)

d)

e)

used to:

Sharpe index uses _____ while the Treynor

index uses _____ for the risk measure.

1

2

3

4

5

premium, indicating that market interest

rates have fallen since the issue date.

4 The yield to maturity is less than the yield

to call.

advantage of a perceived yield

differential between bonds that are

similar with respect to coupons, ratings,

maturities, and industry.

2 Rate anticipation swaps are based on

forecast s of general interest rate

changes.

3 The yield pickup swap is designed to

change the cash flow of the portfolio by

exchanging similar bonds that have

different coupon rates.

Investment Planning

Workbook

substitute capital gains for current yield.

a)

b)

c)

d)

e)

1, 2, and 3 only.

1 and 3 only.

2 and 4 only.

4 only.

1, 2, 3, and 4.

model developed by Harry Markowitz.

Which of the following statements is/are

correctly identified with this model?

1 The risk, return and covariance of assets

are important input variables in creating

portfolios.

2 Negatively correlated assets are

necessary to reduce the risk of portfolios.

3 In creating a portfolio, diversifying across

asset types (e.g., stocks and bonds) is

less effective than diversifying within an

asset type.

4 The efficient frontier is relatively

insensitive to the input variable.

a)

b)

c)

d)

e)

1 and 2 only.

1, 2, and 3 only.

1 only.

2 and 4 only.

1, 2, and 4 only.

designed to provide both growth and

income?

a) Fixed premium annuity.

b) Non-participating mortgage real estate

investment trust (REIT).

c) Aggressive growth mutual fund.

d) Convertible bond.

113. Jennifer is optimistic about the long-term

growth of her Widget stock. However, the

stock, currently priced at Rs.58, has made

a sharp advance in the last week and she

wants to lock in a minimum price in case

the shares drop. What might Jennifer do?

a)

b)

c)

d)

Workbook

Sell Rs.55 call options.

Buy Rs.55 put options.

Sell Rs.55 put options.

and pays a dividend of Rs.2.30. Analysts

project a dividend growth rate of 4%. Your

client Tom requires a rate of 9% to meet his

stated goal. Tom wants to know if he should

purchase stock in Company ABC.

a) Yes, the stock is undervalued.

b) No, the stock is overvalued.

c) No, the required rate is higher than the

projected growth rate.

d) Yes, the required rate is higher than the

expected rate.

e) No, the required rate is lower than the

expected rate.

115. If the client needs to accumulate wealth but

is risk-averse, which of the following is the

most crucial action the planner needs to take

to have the client achieve the goal of wealth

accumulation? Advise investing the client's

current assets.

a) In the products which will bring the highest

return to the client regardless of risk.

b) In products that produce high income for

the client because fixed income products

are generally safe.

c) In diversified mutual funds because of

the protection which diversity provides.

d) After determining the client's risk tolerance.

e) In 100% cash equivalents in the portfolio

because most soft ware programs

recommend this safe approach.

116. Which of the following would result in the

largest increase in the price of a diversified

common stock mutual fund?

a)

b)

c)

d)

Unexpected inflation.

Expected dividend increases.

Unexpected corporate earnings growth.

Expected increase in the prime interest

rate.

of risk/return on the capital market line (CML),

superior performance exists if the fund's

position is the CML, inferior performance

exists if the fund's position is the CML, and

equilibrium position exists if it is the CML.

a)

b)

c)

d)

e)

Investment Planning

Above; below; on.

Below; on; above.

Below; above; on.

On; above; below.

15

a debenture?

a) A long-term corporate promissory note.

b) An investment in the debt of another

corporate party.

c) A long-term corporate debt obligation

with a claim against securities rather

than against physical assets.

d) A corporate debt obligation that allows

the holder to repurchase the security at

specified dates before maturity.

e) Unsecured corporate debt.

119. A client has a cash need at the end of seven

years. Which of the following investments

might initially immunize the portfolio?

1 A 9-year maturity coupon bond.

2 A 7-year maturity coupon Treasury note.

3 A series of Treasury bills.

a)

b)

c)

d)

e)

period of time (assuming share price

fluctuations).

4 Invests the same rupee amount each

month to protect the investment from

loss of capital.

a)

b)

c)

d)

e)

1 and 2.

1 and 3.

2 and 3.

2 and 4.

1, 2, 3, and 4.

the caselet below and answer the questions

Smith invests in a limited partnership that requires

an outlay of Rs.9,200 today. At the end of years 1

through 5, he will receive the after-tax cash flows

shown below. The partnership will be liquidated

at the end of the fifth year. Smith is in the 28% tax

bracket.

1, 2, and 3.

1 only.

2 and 3.

2 only.

1 and 2.

statements about investment risk is correct?

1 Beta is a measure of systematic, nondiversifiable risk.

2 Rational investors will form portfolios and

eliminate systematic risk.

3 Rational investors will form portfolios and

eliminate unsystematic risk.

4 Systematic risk is the relevant risk for a

well-diversified portfolio.

5 Beta captures all the risk inherent in an

individual security.

a)

b)

c)

d)

e)

a)

b)

c)

d)

e)

17.41%.

19.20%.

24.18%.

28.00%.

33.58%.

correct?

1, 2, and 5.

1, 3, and 4.

2 and 5.

2, 3, and 4.

2 and 5.

statements is true regarding the investment

strategy known as "Rupee-cost averaging"?

1 Invests the same Rupee amount each

month over a period of time.

2 Purchases the same number of shares

each month over a period of time.

16

equates the present value of an

investment's expected costs to the

present value of the expected cash

inflows.

2 The IRR is 24.18% and the present value

of the investment's expected cash flows

is Rs.9,200.

3 The IRR is 24.18%. For Smith to actually

realize this rat e of return, the

investment's cash flows will have to be

reinvested at the IRR.

Investment Planning

Workbook

is 9%, the investment should be rejected

because its net present value will be

negative.

a)

b)

c)

d)

e)

2 and 4.

2 and 3.

1 only.

1, 2, and 3.

1 and 4.

caselet below and answer the question.

The tax bracket and holdings of your client are as

follows:

l

change in price than Bond C because it

has a shorter duration.

e) The percent change in the price of Bonds

A and C is equal since it is not affected

by duration.

126. The following set of newly issued debt

instruments was purchased for a portfolio:

Treasury bond, Z ero-coupon bond,

Corporate bond, Municipal bond.

The respective maturities of these

investments are approximately equivalent.

Which one of the investments in the

preceeding set would be subject to the least

amount of price volatility if interest rates were

to change quickly?

a)

b)

c)

d)

Treasury bond.

Zero-coupon bond.

Corporate bond.

Municipal bond.

investment characteristics of a high-quality

long-term municipal bond?

124. During the 12 months from June 30th, last

year, through June 30th, this year, the

portfolio earned, in annual yield and beforetax appreciation, respectively:

a)

b)

c)

d)

5.5% and

5.5% and

6.6% and

6.6% and

17.5%.

21.3%.

17.5%.

21.3%.

Bond A, would have a larger percent

increase in price than Bond A.

b) The percent change in price of a bond is

independent of the duration of a bond.

c) It is not possible to determine the percent

change in price of Bond A versus Bond

C because the duration of Bond C is not

given.

Low inflation risk; high market risk.

Low inflation risk; low default risk.

High inflation risk; high market risk.

Amalgamated Corporation shares, currently

at Rs.46. She is happy with the stock but

realizes that a good thing cannot go on

forever. If she is willing to sell at 50, what

strategy could you recommend to her?

a)

b)

c)

d)

years, which of the following statements

about the effect of a 1% decline in interest

rates is true?

Workbook

a)

b)

c)

d)

Sell Rs.50 call options.

Buy Rs.50 put options.

Sell Rs.50 put options.

of all new public information." This

statement is an expression of which one of

the following ideas?

a) Random walk hypothesis.

b) Arbitrage pricing theory.

c) Semi-strong form of the efficient market

hypothesis.

d) Technical analysis.

Investment Planning

17

similar risk bonds is 8%, determine the

discounted present value of a Rs.1,000 bond

with a 7.5% coupon rate, which pays interest

semiannually and matures in 17.5 years.

a)

b)

c)

d)

e)

Rs.504.68.

Rs.539.78.

Rs.953.34.

Rs.968.96.

Rs.1,653.26.

2 Interest rate risk.

3 Prepayment risk.

a)

b)

c)

d)

performance data, which fund had the best

risk-adjusted performance if the risk-free

rate of return is 5.7%?

highest.

b) Fund A because the standard deviation

is lowest.

c) Fund C because the Sharpe ratio is

lowest.

d) Fund D because the Treynor ratio is

highest.

e) Fund A because the Treynor ratio is

lowest.

132. To immunize a bond portfolio over a specific

investment horizon, an investor would do

which of the following?

a) Match the maturity of each bond to the

investment horizon.

b) Match the duration of each bond to the

investment horizon.

c) Match the average weighted maturity of

the portfolio to the investment horizon.

d) Match the average weighted duration of

the bond portfolio to the investment

horizon.

18

which of the following risks?

2 only.

1 and 2 only.

1 and 3 only.

1, 2, and 3.

you have not spoken with previously. The

caller is excited, just having heard that a

new mutual fund is positioned to deliver

large gains in the coming year. The caller

wishes to purchase shares of the fund

through you. Keeping in mind stages of

the overall personal financial planning

process, which of the following questions

that addresses the first two stages of the

financial planning process should you ask

the caller?

1

2

3

4

What other investments do you have?

What is your date of birth?

Do you want your dividends reinvested?

a)

b)

c)

d)

1 and 3 only.

2 and 4 only.

1, 2, and 3 only.

1, 2, and 4 only.

1

2

3

4

Current price.

Time to maturity.

Yield to maturity.

Coupon rate.

a)

b)

c)

d)

e)

1 and 3 only.

2 and 3 only.

2 and 4 only.

1, 2, and 3 only.

1, 2, 3, and 4.

Investment Planning

Workbook

offers a single cash inflow of Rs.13,000,000

aft er 1 year. Invest ment B costs

Rs. 1,000,000 and will be worth

Rs.2,000,000 at the end of the year. The

appropriate discount rate or required rate

of return is 10% compounded annually.

Match the investment(s) listed below with

the corresponding financial information

provided.

a)

b)

c)

d)

Investment A.

Investment B.

None of them.

Either A or B.

Rs.28.57.

Rs.38.50.

Rs.40.04.

Rs.41.60.

a large percentage of the return to be tax

efficient. Which of the following products

would be most appropriate for this client?

a)

b)

c)

d)

Balanced mutual fund.

Preferred stock mutual fund.

Stock index fund.

If the interest is compounded monthly at an

annual rate of 4%, what would be the

amount that Rani would receive in five years

time? (use 2 decimal places)

a)

b)

c)

d)

Rs.12,158.65

Rs.12,209.97

Rs.12,188.65

Rs.12.187.65

annual interest rate compounded quarterly.

What is the amount she has to repay after

five years?

a)

b)

c)

d)

Workbook

a)

b)

c)

d)

Rs.12561.26

Rs.12562.11

Rs.12562.26

Rs.12564.26

Assuming that he has to repay Rs.6,500 now,

how much interest rate was he charged?

Rs.3.85. If future dividends are expected to

grow at 4% forever, which of the following

amounts should Zeta stock sell for if the

required rate of return on the stock is 14%?

a)

b)

c)

d)

three years time for a one-month USA trip

upon her graduation. Assuming she can get

6% annual return compounded semiannually from her investment, how much

must she invest today to achieve her goal?

a)

b)

c)

d)

5.28

5.39

5.93

5.82

coupon of 7.5% and is compounded

quarterly duration 4 yrs. similar bond in

market yield 8% what is PV of the bond?

a)

b)

c)

d)

Rs.982.03

Rs.983.03

Rs.984.03

Rs.985.03

compounded annually for first 1 yr and

quarterly for next 2 years. What would be

her maturity benefit?

a)

b)

c)

d)

Rs.25076.35

Rs.25075.72

Rs.18951.71

Rs.20277.68

coupon of 7.5% and is compounded semi

annually duration 4.5 yrs. similar bond in

market yield 8% what is PV of the bond?

a)

b)

c)

d)

Rs.981.41

Rs.982.42

Rs.983.25

Rs.980.25

Rs.2,762.24

Rs.2,763.24

Rs.2,769.24

Rs.2,768.28

Investment Planning

19

p.a. compounded quarterly for first 2 yrs and

annually for next 2 years. What would be

his maturity benefit?

a)

b)

c)

d)

Rs.24599.22

Rs.24566.33

Rs.25501.33

Rs.26502.23

coupon of 8.5% and is compounded

annually, duration 12 yrs., similar bond in

market yield 9% what is PV of the bond?

a)

b)

c)

d)

Rs.963.20

Rs.964.20

Rs.964.80

Rs.965.80

p.a. compounded annually for first 1 yr and

half yearly for next 2 years. What would be

her maturity benefit?

a)

b)

c)

d)

Rs.18524.21

Rs.18951.71

Rs.19850.71

Rs.19849.21

of TISCO at Rs. 200 each. 50% of the value

of these debentures is converted into one

share of Rs. 80 each after 4 years. Mr. Singh

exercises his options after 4 yrs and

receives 100 shares. Compute cost of

acquisition of each share.

a)

b)

c)

d)

Rs.200

Rs.250

Rs.275

Rs.300

p.a. compounded annually for first 1 yr and

quarterly for next 3 years. What would be

her maturity benefit?

a)

b)

c)

d)

20

of ABB at Rs. 300 each. 50% of the value

of these debentures is converted into one

share of Rs.80 each after 5 years. Mr. Singh

exercises his options after 5 yrs and

receives 120 shares. Compute cost of

acquisition of each share.

a)

b)

c)

d)

Rs.350

Rs.360

Rs.375

Rs.380

coupon of 7.5% and is compounded semi

annually, duration 17.5 yrs., similar bond in

market yield 8% what is PV of the bond?

a)

b)

c)

d)

Rs.956.34

Rs.953.34

Rs.1074.43

Rs.987.60

of Reliance Ind. at Rs. 300 each. 60% of

the value of these debentures is converted

into one share of Rs. 80 each after 7 years.

Miss. Savi exercises his options after 7 yrs

and receives 100 shares. Compute cost of

acquisition of each share.

a)

b)

c)

d)

Rs.400

Rs.420

Rs.425

Rs.450

coupon of 6.5% and is compounded semi

annually, duration 13.5 yrs. similar bond in

market yield 7% what is PV of the bond?

a)

b)

c)

d)

Rs.957.79

Rs.985.79

Rs.956.79

Rs.958.79

Rs.20277.68

Rs.20278.22

Rs.22285.25

Rs.20275.78

Investment Planning

Workbook

debentures of Asian hotels at Rs. 300 each.

60% of the value of these debentures is

converted into one share of Rs. 100 each

after 7 years. Miss. Seema exercises his

options after 7 yrs and receives 150 shares.

Compute cost of acquisition of each share.

a)

b)

c)

d)

a)

b)

c)

d)

Rs.225

Rs.250

Rs.275

Rs.300

semi- annually. Duration is 3 years. The

yield on bond is 12%. Find current price.

a)

b)

c)

d)

Rs.1000.83

Rs.1050.43

Rs.986.36

Rs.950.83

Rs.200

Rs.225

Rs.250

Rs.275

Rs.912.98

Rs.912.38

Rs.913.28

Rs.914.88

Workbook

Rs.31706.49

Rs.30706.49

Rs.30705.29

Rs.30704.29

compounded monthly .What will be the

value of his investment after 4 years?

a)

b)

c)

d)

Rs.6877.33

Rs.6876.33

Rs.6878.33

Rs.6876.88

b) Liquidation value based on the proceeds

of liquidation of the company.

c) Present value of all the dividends to be

received from holding that share.

d) Apply the P / E ratio to expected earnings

per share.

164. If a bond is selling at a premium _______.

monthly .What will be the value of his

investment after 6 years?

a)

b)

c)

d)

Rs.978.62

Rs.978.42

Rs.978.52

Rs.979.72

coupon of 7.5% and is compounded

quarterly, duration 16 yrs, similar bond in

market yield 8.5% what is PV of the bond?

a)

b)

c)

d)

Rs.375

Rs.380

Rs.385

Rs.390

coupon of 7.5% and is compounded semi

annually duration 5 yrs, similar bond in

market yield 8% what is PV of the bond?

a)

b)

c)

d)

debentures of ACC. at Rs. 300 each. 60%

of the value of these debentures is

converted into one share of Rs. 50 each

after 8 years. Mrs. Shikha exercises his

options after 8 yrs and receives 200 shares.

Compute cost of acquisition of each share.

a)

b)

c)

d)

of Telco at Rs. 250 each. 40% of the value

of these debentures is converted into one

share of Rs. 50 each after 6 years. Mr. Sushil

exercises his options after 6 yrs and receives

80 shares. Compute cost of acquisition of

each share.

a) It is an attractive investment

b) Its realised compound yield will be less

than the yield to maturity

c) Its coupon rate is below market rate

d) Its current yield is lower than the coupon rate

165. Which of the following is NO T a

characteristic of a balance fund?

a) It provides both growth and income

objectives

b) It is less risky than growth funds

c) It is more risky than income funds

d) It must invest in both equity and bonds

in equal amount

Investment Planning

21

Rs.8,00,000. He wants to sell it in 20 years

time for Rs. 20,00,000. His friend who is a

real estate agent estimates that the house

will appreciate in value by 6% for the first 8

years, 5% for the next 8 years and 4.50%

for the last four years. What will be the value

of the house after 20 years and will Purohit

be able to realise his desired value?

a)

b)

c)

d)

Rs.21,85,489, Yes

Rs.22,46,552, Yes

Rs.19,54,413, No

Rs.17,45,387, No

include all of the following except:

a) Performance record of other clients.

b) The method of remuneration, fees and

commissions.

c) Access to internal and external complaint

handling mechanism.

d) Disclosure of any conflict of interest.

168. Which of the following costs best describes

the cost of foregone income that results from

making an economic decision to use funds

to purchase a piece of equipment?

a)

b)

c)

d)

Cost of Capital

Fixed Cost

Marginal Cost

Opportunity Cost

foreign equities, Indian Corporate Bonds,

Indian Government Gilts is subject to the

following risks?

1.

2.

3.

4.

Business Risk,

Default Risk,

Systematic Risk,

Interest Rate Risk.

a)

b)

c)

d)

1 & 3 only

1,3 & 4 only

3 & 4 only

1,2,3 & 4

a)

b)

c)

d)

1 only

1 & 2 only

2 & 3 only

1,2 & 3

15 times earnings but the market was

pricing similar shares at 19 times, this would

be ____________.

a)

b)

c)

d)

The investor cannot take a position

An example of low gearing

Bargain not to be missed

options for Rs. 15. The current share price

is Rs. 345. The break-even share price,

ignoring transaction costs is Rs.________.

a)

b)

c)

d)

350

360

365

None of the above

relating to the following Capital Market

issues will not be entertained by SEBI?

a) A company declaring no dividend on

equity for the fourth consecutive year.

b) A company has declared dividend but

not paid the same after six months of

declaration.

c) A company not paying the redemption

proceeds on debentures issued by the

company, one year after maturity date.

d) None of the above cases.

174. In ranking portfolio performance, which

measure of risk does the Treynor Index

use?

concerning technical stock market indicators

is/are correct?

1. The stock market is considered strong

when the volume of the market is

increasing in a rising market.

22

the percent of odd-lot short sales

significantly increases or decreases.

3. Prices crossing the moving average line

would be an indication of the change in

the market.

a)

b)

c)

d)

Investment Planning

standard deviation

variance

beta

alpha

Workbook

portfolio by_______.

a)

b)

c)

d)

Selling call options

Buying index options

Selling put options

conditions under which the unit holders money

is to be invested. It specifically details:

a)

b)

c)

d)

The types of authorized investments

All fees and charges

All of the above

a)

b)

c)

d)

Holding period return

Systematic risk

Unsystematic risk

exercise price is X, the intrinsic value of the

call option is_______.

a)

b)

c)

d)

Max (O, X-S)

Min (O, S-X)

Min (O, X-S)

a) Determines the geometric return of a

security.

b) Determines time-weighted return

c) Explain return in terms of risk.

d) Explains systematic risk

180. GE is an AAA rated issuer of Corporate

Bonds in the International Debt markets.

The issue price of a typical GE corporate

bond is affected by all the following EXCEPT

the _________.

a) Face value, coupon rate, and maturity

of the bond.

b) Firms required return on debt.

c) Percentage of debt in the firm's capital

structure.

d) Required return on the firm's competitors'

bonds.

Workbook

process is better than I.P.O at fixed price

because_______.

a) High fixed price will result in under

subscription leading to loss to the investor.

b) It helps the issuer to ascertain the exact

price at which the investor is willing to

subscribe.

c) Low fixed price will result in over

subscription leading to loss to the issuer.

d) All of the above

182. A client purchased a mutual fund with a

Rs.10, 000 lump-sum amount four years

ago. During the four years, Rs.4, 000 of

dividends was reinvested. Today the

shares are valued at Rs.20,000 (including

any shares purchased with dividends). If

the client sells shares equal to Rs.13,000,

which statement (s) is/are correct?

1. The taxable gain can be based on an

average cost per share.

2. The client can choose which shares to

sell, thereby controlling the taxable gain.

3. To minimize the taxable gain today; the

client would sell shares with the higher

cost basis.

4. The client will not have a gain as long as

he/she sells less than what he/she

invested.

a)

b)

c)

d)

1, 2, and 3 only.

1 and 3 only.

2 and 4 only.

only.

statements about investment risk is correct?

1. Beta is a measure of systematic, nondiversifiable risk.

2. Rational investors will form portfolios and

eliminate systematic risk.

3. Rational investors will form portfolios and

eliminate unsystematic risk.

4. Systematic risk is the relevant risk for a

well-diversified portfolio.

5. Beta captures all the risk inherent in an

individual security.

a)

b)

c)

d)

e)

Investment Planning

1, 2, and 5.

1, 3, and 4.

2 and 5.

2, 3, and 4.

2 and 5.

23

would you recommend to a 60 year old

retiree who depends on his investments for

monthly income?

a) Fixed Deposits:

Equities: 10%

b) Fixed Deposits:

Equities: 30%

c) Fixed Deposits:

Equities: 40%

d) Fixed Deposits:

Equities: 50%

40% Properties: 30%

20% Properties: 40%

10% Properties: 40%

increasing risk:

I

II

III

IV

Growth Fund,

Balanced Fund,

Bond Fund,

Small Cap Fund

a)

b)

c)

d)

III, II, IV, I

III, II, I, IV

III, IV, I, II

Sponsor

AMC

Trustee

Custodian

Derivatives market

Real Estate market

Fixed Income Market

Stockmarket

24

Fixed Deposits

Mutual Funds

Equity Shares

Real Estate

a)

b)

c)

d)

Customised

Novated

Standardised

Without counterparty risk

for an Indian investor with a flair for global

diversification

Diversified

Sector

International

Global

____________ asset

a)

b)

c)

d)

Investment Planning

Will Planning

Insurance planning

has an excess of ______ as investments.

a)

b)

c)

d)

ratio

a)

b)

c)

d)

in the __________

a)

b)

c)

d)

Service tax

Securities Transaction Tax

Brokerage

Depository Participant Charges

buyer

b) Confers an obligation but no right to the

buyer

c) Enables an investor to take a leveraged

position

d) Protects the buyer against downside risk

___________

a)

b)

c)

d)

a)

b)

c)

d)

is an employee of the _______

a)

b)

c)

d)

______ is paid are eligible for zero long term

capital gains tax

Intangible

Investment

Near-Cash

None of the above

increase in the duration of corporate bond.

I. an increase in the number of years to

maturity.

II. a decrease in the coupon rate

III. change from annual to semiannual

coupon payment.

IV. change from annual coupon to zero

coupon bond

a)

b)

c)

d)

Investment Planning

I, II and IV only

I, III & IV only

II, III & IV only

Workbook

fund will be most warding in _________

a)

b)

c)

d)

A secular uptrend

A secular downtrend

Volatile markets

A sideways market

issuance to fund a new power plant at

Noida, UP. They are issuing Two Year

maturity, Zero-coupon bond with face value

of Rs 1000 and yield of 4%. What price

would you pay for this Tata Power Zerocoupon bond today?

a)

b)

c)

d)

145.64

156.22

168.59

172.56

addition to it, you expect that the return on

market would be 14%. The expected return

of Security A with beta of 0.70 is ________.

a)

b)

c)

d)

12.2%.

15.4%.

17.8%.

18.2%.

primarily measure ______________

a)

b)

c)

d)

Workbook

Liquidity

Solvency

Savings potential

Debt servicing capacity

a)

b)

c)

d)

0.94

1.07

1.31

1.91

concerning contracts of insurance. Identify

the statement/s that is/are correct.

Rs. 920.00.

Rs. 924.56.

Rs. 925.95.

Rs. 960.00.

portfolio consisting of securities X and Y.

Standard deviation of X is 12. 43%.;

Standard deviation of Y is 16. 54%.;

Correlation coef ficient is 0.82.; The

interactive risk of the portfolio, measured by

covariance is __________

a)

b)

c)

d)

previous year, while the market had an

average return of 10%. The standard

deviation of the portfolio was calculated to

be 20%, while the standard deviation of the

market was 15% over the same time period.

If the correlation between the portfolio and

the market is 0.8, what is the Beta of the

portfolio A?

misstatement of the insured's age

constitutes avoidable misrepresentation.

II. An innocent misrepresentation by an

applicant for insurance constitutes fraud.

a)

b)

c)

d)

I only

II only

I and II

Neither I nor II

concerning the movement in f oreign

exchange rates are true, assuming that all

other factors remain unchanged?

I. The exchange rate will appreciate with

an increase in domestic interest rates

II. Increasing international reserves leads

to a stronger exchange rate

III. Strengthening the exchange rate leads

to a temporary increase in the

competitiveness of exports

IV. Lower domestic inflation leads to a

weakened exchange rate

a)

b)

c)

d)

Investment Planning

I & II only

II & III only

III & IV only

I & IV only

25

bond with a coupon rate of 8.0%. The

prevailing yield to maturity of bonds with

similar risk and term is 10.0%.The bond will

sell at ____________ to its face value.

a)

b)

c)

d)

a premium

a discount

par

a predetermined price

of the stock of Company A, with the following

information:

Price = Rs.5.00

Profit before tax = Rs.75.0 million

Profit after tax = Rs.54.0 milllion

Paid up Capital = Rs.100 million at par value

of Rs.0.50 per share

a)

b)

c)

d)

6.7

9.3

13.3

18.5

semi-strong form of market efficiency

strong form of market efficiency

total market efficiency

impact on stock prices?

I. increase in risk premiums

II. increase in dividend growth rate

III. increase in the discount rate

IV. increase in interest rates

a)

b)

c)

d)

I II & IV only

I, III & IV only

II, III & IV only

a)

b)

c)

d)

Stock B will move down by 12%

Stock B will move up by 9%

Stock B will move down by 9.0%

investment risk are true?

I. Beta captures all the inherent risks in an

individual security

II. Unsystematic risk is reduced in a

portfolio because securities are not

perfectly correlated

III. As Beta increases, the expected return

also increases

IV. Rational investors will form portfolios to

eliminate systematic risk

a)

b)

c)

d)

I & II only

II & III only

III & IV only

I & IV only

advantages of money market funds?

I. Provides current income

II. Provides safety of principal

III. Notice is required for withdrawal

IV. Provides capital gains

a)

b)

c)

d)

26

25.00

11.00

9.75

9.50

with a correlation coefficient of 0.75. When

stock A moves up by 12%, how will stock B

perform?

a)

b)

c)

d)

outperformed the BSE Sensex based on tips

he received from a friend working in a

corporate finance department. Which of the

following is his success a violation of?

a)

b)

c)

d)

investment with the following distribution of

possible outcomes?

Investment Planning

I only

I & II only

I, II and III only

All of the above

Workbook

when he has Rs.400,000. He believes that

he can save Rs.10,000 at the end of each

year. Being risk adverse, he places his

funds in fixed deposits earning only 5.0%

pa. His savings at this point is Rs.20,000.

At what age will he be able to retire?

a)

b)

c)

d)

53 years

51 years

68 years

70 years

Rs.8.0 million investment with the following

cash flows:

years.

a)

b)

c)

d)

Rs.2.23 million

Rs.3.8 million

Rs.5.0 million

Rs.10.5 million

with interest compounded annually at

maturity. Mr B places his fixed deposit with

another bank with interest compounded

quarterly. Assuming that the deposit amount

is Rs.100,000, and using the same annual

rate of 6%, what is the difference in future

value after one year?

a)

b)

c)

d)

Rs.130.43

Rs.132.54

Rs.134.22

Rs.136.36

the use of technical analysis?

a) Future performance should be reflective

of past performance

b) The values of market indices and stock

prices are determined based on supply

and demand

c) Stock prices move in trends that would

persist over long periods

d) All the above

Workbook

provides the highest level of diversification?

a) Portfolio 1 & 2: with

coefficient of + 0.92

b) Portfolio 3 & 4: with

coefficient of + 0.37

c) Portfolio 5 & 6: with

coefficient of 0

d) Portfolio 7 & 8: with

coefficient of -0.78

a correlation

a correlation

a correlation

a correlation

directly proportional to __________

a)

b)

c)

d)

the assets under management

its operating expenses

the sponsor's net worth

before him. The interest rate, and other

conditions are the same for both, except that

one has a repayment term of 15 years and

the other has a repayment term of 30 years.

Anil wants to evaluate the EMIs for both

terms. All other conditions being the same,

repaying a loan in 15 years instead of 30

would require EMIs that are________.

a) Half the size of the 30-year loan

payments.

b) Less than twice as large as the 30 year

loan payments.

c) More than twice as large as the 30 year

loan payments.

d) Twice as large as the 30 year loan

payments.

219. 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 percent indefinitely.

If you are looking at a 12 percent return, how

much will you be willing to pay for one share

of All Is Fine Business Services?

a)

b)

c)

d)

Investment Planning

Rs. 24.79.

Rs. 29.38.

Rs. 30.55.

Rs. 32.45.

27

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 Rs. 10 Lakh p.a. Based on

the concept of capitalized earning approach and

assuming that you require a capitalization rate

of 10%, how much is the complex worth now?

a)

b)

c)

d)

Rs. 1.70 crore

Rs. 2.00 crore

None of the above.

Securities A and B?

Given the following information about

securities A and B:

Historical Returns for Securities:

a)

b)

c)

d)

1 and 3

1 and 4

2 and 3

2 and 4

link houses in the BKC area, how much should

your client pay for the link house in BKC 4?

28

Rs.

Rs.

Rs.

Rs.

Rs.114

Rs.105

Rs.100

Rs. 62

Funds A & B with details as provided below.

Both funds subsequently appreciated by

18% based on their NAV.Which of the

following statements is/are true?

Fund A.

II. The investor obtained 6,896.55 units in

Fund B.

III. The investor would have achieved a higher

return by investing in Fund A alone

IV. The investor would have achieved a higher

return by investing in Fund B Alone

a)

b)

c)

d)

a)

b)

c)

d)

8.10%

7.69%

7.00%

6.05%

the price of the stock of Company A, with

the following information:

EPS = Rs.10 per share

Current Dividend = Rs.8 per share

Dividend growth rate = 5.0%

Risk free rate = 6.0%

Company A risk premium = 7.0%

a)

b)

c)

d)

standard deviation.

2) B is less risky because it has a lower

standard deviation.

3) A has a lower risk-adjusted return.

4) B has a higher risk-adjusted return.

a)

b)

c)

d)

the following parameters:

Face Value : Rs.1000.00

Market Price : Rs.1040.00

Coupon Rate (paid annually) : 7.0%

Remaining Term to Maturity : 5 years

I & II only

I, II & III only

I, II & IV only

III only

306,657

303,121

299,041

293,786

Investment Planning

Workbook

with yield to maturity of 6% maturing in 6

years time?

a)

b)

c)

d)

4.35

5.34

6.00

6.35

bought units of Fund A on 31/12/06 and sold

the units on 31/12/07 with the information

provided below:

investment depends primarily on:

a) the length of time the investor expects

to hold the investment.

b) the amount of the investment.

c) whether a liquid market exists for selling

the investment.

234. A period when an economy is experiencing

substantial growth and a declining jobless

rate is called _____________.

a)

b)

c)

d)

a)

b)

c)

d)

be settled by delivery.

0.9%

4.4%

11.3%

17.0%

highly risk averse investor aged 57 is _____

a)

b)

c)

d)

a diversified equity fund.

a Maharashtra State Government Bond.

a SBI Fixed Deposit.

are expected to peak in the following order:

a)

b)

c)

d)

Margin, profit, revenue

Margin, revenue, profit

Profit, margin, revenue

a) Consumer Price Index

b) Wholesale Price Index

c) Both (a) and (b)

231. NPV is calculated in the case of a series of

_________ cash flows.

a)

b)

c)

d)

Zero

Single

Uneven

Even

the Discounting Rate ____________.

a)

b)

c)

d)

e)

Workbook

Decreases, Decreases

Increases, Increases

Increases, Decreases

Data Insufficient

Stagflation

Deflation

Depression

Boom

a) Commodities

b) Stocks

c) Stock Index

236. Money has time value. It derives this value due

to existence of several conditions. Which one

of the following is not one of the conditions

contributing to the existence of this value?

a) Possibility of increase in tax rates over

time.

b) Ability to buy/ rent assets generating

revenue

c) Cost of foregoing present consumptions

d) None of the above.

237. You have term deposits of Rs. 4,00,000 with

a bank. In order to meet sudden

requirements for liquidity and short-term

credit, you are applying for an overdraft

facility with the bank. What is the rate of

interest you will pay on this facility?

a) The bank will apply a flat rate of interest

on the amount of overdraft allowed to

actually utilize.

b) The bank will apply a flat rate of interest

on the amount of overdraft allowed to you.

c) The bank will apply rate of interest linked

to the term deposit rate, on the amount

of overdraft utilized.

d) The bank will apply rate of interest linked

to the term deposit rate, on the average

amount of overdraft remaining

Investment Planning

29

you advised your client to reduce his equity

exposure. The client is annoyed. What might

be the most appropriate action to take

immediately?

a) Apologize for wrongly forecasting the

market

b) Change his asset allocation by

increasing his equity exposure

c) Help the client understand the logic of

his asset allocation

d) Rebalance his asset allocation by

reducing equity investments

239. A professional indemnity policy protects the

insured from risk arising out of ________.

a) Intentional misconduct

b) Misrepresentation of professional

competence

c) Negligence

d) Undisclosed conflict of interest

240. Protector International is a financial services

firm that specializes in investment advisory

services. In its brochure for Financial

Planning services, it may state ________.

a) It can offer superior investment returns

on customer portfolios and talk of the

arrangements to offer advice in other

areas

b) It has the competence to take care of all

Financial advisory requirements of the

customer

c) Its competence in investment advisory

services and the arrangements to offer

advice in other areas

d) Its Financial Planning services are the

best available in the market in light of its

investment advisory capabilities and

arrangements to offer advice in other

areas

241. Which of the following is a concurrent

indicator of the phase of the business cycle?

a)

b)

c)

d)

30

Index of Industrial production

Labor costs and capacity utilization

Order levels in the manufacturing sector

_________ as the periods of compounding

increase.

a)

b)

c)

d)

Increases

Decreases

Remains same

Decreases for some time and then

increases

e) Data insufficient

243. What is the main difference between the

personal Financial Planning needs of the

employed and the self-employed?

a)

b)

c)

d)

Need to fund children's education

Need to fund retirement

The extent of any employer-provided

pension benefits

which of the following risk/s:

1) Interest rate risk

2) Reinvestment rate risk

3) Maturity risk

a)

b)

c)

d)

1 only

2 only

1 & 2 only

1, 2 & 3

expansion and growth. Industrial production

and profitability are high. Your client has a

portfolio that is heavily invested in bonds.

Which of the following fears of the client is

well founded?

a) Higher rates of growth will increase

demand for funds and interest rates will

firm up, leading to fall in bond prices.

b) Higher rates of growth will require higher

imports and expenses. The government

deficits will go up.

c) The central bank will try to reduce rates

to make funding of business cheaper and

reduce costs.

d) The currency will become convertible

and i nt erest rat es wi ll rise as a

consequence.

Investment Planning

Workbook

His wife has some large investments in the

shares of a few companies. Ram is required

to offer views on almost all of these holdings

to clients. Under the Code of Ethics and

Rules of Professional Conduct _______

the market, you should buy a(n)

client(s) so as to make them aware of

any potential conflict of interest

b) Ram has to disclose these holdings only

to his employers, if required by the firm's

internal compliance rules

c) Ram need not follow any code of ethics

and rules of professional conduct.

d) Ram will not violate the Code and the

Rules if he does not disclose his wife's

holdings

you typically not undertake in this effort?

and IRR calculations?

a) By including them in the interest

payments.

b) By considering the interest rate in the

setting of the discount rate

c) As a tax deduction

d) By including them in the earnings

248. The term "Efficient Frontier" is contained

in________.

a) Technical Analysis

b) Modern Portfolio Theory

c) Value Investing Theory

249. A major difference between load and noload funds is :

a) Marketability: no-load funds can be

traded more readily.

b) Acquisition cost: load funds cost more

than their NAVs.

c) Performance: load funds do better.

250. The Reliance fund trades on the NSE. Its

recent price is Rs.10, but its NAV is Rs.12.

We know then :

a) The fund is closed-end, selling at a

discount.

b) The fund is open-end, selling at a

premium.

c) The fund is closed-end, selling at a

premium.

Workbook

a) Growth Fund

b) Money Market Fund.

c) Index Fund.

b) Calculate the fund's NAV.

c) Find the fund's turnover ratio and

administrative expenses-to-assets ratio.

253. The Cholamandalam Fund's rate of return

was 9%, while the market return was 15%.

Cholamandalam's beta was 0.5.

a) Cholamandalam's management outperformed the market on a risk-adjusted

basis.

b) Cholamandalam's RAROR was 11.5%.

c) Cholamandalam's management under

performed the market on a risk-adjusted

basis.

254. You are considering taking a passenger with

you when you go home over Christmas

break. She lives 100 kms out of your way,

and the total trip is 500 kms. She has offered

Rs.500 for the service. You estimate the

total cost of the trip at Rs.3000. You should

a) Reject the offer since 20% (1000/5000)

of Rs.3000 is greater than Rs.500.

b) Accept the offer if the opportunity costs

of the trip is greater than Rs.2500.

c) Accept the offers if marginal costs

associated with 100 kms are less than

Rs.500.

255. Liquidity ratio of 2.0 tells us that the family

has :

a) Rs.2 in liquid assets for each Rs.1 in total

liabilities.

b) Rs.2 in liquid assets for each Rs.1 in

current liabilities.

c) Rs.2 in liquid assets for each Rs.1 of total

expenses.

256. In India, Preference shares may be issued

for a maximum number of ____ years.

a)

b)

c)

d)

Investment Planning

12

15

10

20

31

tax purpose is applicable on:

i.

ii.

iii.

iv.

Individual

Firm

Company

HUF

a)

b)

c)

d)

i,ii,

i,ii, iii

i only

i, ii, iii, iv

share is bought for Rs. 250 and sold for

Rs. 450 after 5 years, the compound

annual growth rate is:

a)

b)

c)

d)

14.86%

12.47 %

11.50%

10.71%

is Rs. 500 and the current share price

is Rs. 550. The call option premium is

Rs. 60. The time value of the option is:

a)

b)

c)

d)

60

10

30

15

account and same amount in his wifes

account. How much maximum amount can

he deposit in his nephews name?

a)

b)

c)

d)

Rs. 20,000

Nil

Rs. 70,000

Rs. 60,000

coupon rate will mature after 7 years. Find

the value of the bond if the discount rate is

8 %.

a)

b)

c)

d)

32

Rs.109.85

Rs.111.41

Rs.108.75

Rs.110.41

A & B. The sum total of volatility of A

and B respectively, represented by

standard deviation of t he two

investments, will be equal to the volatility

of the portfolio as a whole if _________.

a) A and B have a correlation of Zero

b) A and B have a correlation of 1

c) The portfolio is equally divided between

A and B

d) The return on the portfolio is equal to the

sum of returns of A and B

263. Which of the following is a correct

interpretation of the Rules of Conduct

pertaining to the Ethic of Confidentiality?

a) A Member must when requested by the

client, provide to a person authorized by

the client, all original documents

prepared or received by the Member in

undertaking the advisory task

b) A Member owes t o the Member's

partners or co-owners a responsibility to

act in good faith (expectations of

confidentiality) only while in business

together, not thereafter

c) The Member shall maintain the same

standards of confidentiality to employers

as to clients

d) Under no circumstance, will any Member

divulge any information or knowledge

regarding the FPSB India or its members

that they may know or be exposed to

264. Mr. Rajan's investment portfolio comprises

Rs.2 lakh in equity, Rs.5 lakh in debt

and Rs.1 lakh in his bank current account.

Over one year the returns on equity and

debt are 5% and 12%. At the end of the

year to maintain his current asset allocation,

he needs to _____________.

a) do nothing.

b) to move Rs, 10000/- from equity and Rs.

60000/- from debt to cash.

c) to move Rs.7500/- to equity from debt

and Rs. 8750/-to cash from debt

d) to invest Rs. 70000/- in debt and equity.

Investment Planning

Workbook

maturing 6 years from today is available

at a yield to maturity of 6.0%. It is likely to

be priced at ____________.

a)

b)

c)

d)

Rs.

Rs.

Rs.

Rs.

1100

1149

1168

1498

to the concept of _______ AUM calculation.

a)

b)

c)

d)

6.40%

3.2%.

6.5%.

7.2%.

negligence?

a) Monthly average

b) Month end

c) Fortnightly average

267. Raykar is an accomplished Financial Planner

and is also an expert on derivatives and high

yielding bonds. He understands client

requirements well and is able to come up with

appropriate portfolio restructuring ideas for

clients. He believes in quickly moving clients

from one investment to another through a dynamic

process of research and recommendations. What

according to the Rules relating to the Code

of Ethics is the most applicable in this case?

a) He does not violate the Rules if he

explains to the client the reasons and is

able to show that the moves are

appropriate to the client

b) He does not violate the Rules since he

conducts and has access to research

and advises on products relevant to

clients based on an understanding of

their requirements

c) He does not violate the Rules since he

is an acknowledged expert and knows

what is best for his clients

d) He violates the Rules as it amounts to

active churning of client portfolios

268. Mrs. & Mr. Arora are aged 55 and 58 years

respectively. Both expect to work till they turn

65. Their only goal is to fund their retirement.

Which of the following is likely to be an

appropriate asset allocation strategy for them?

a) 10% sectoral equity, 20% diversified

equity, 30% long-term debt, and 40%

medium term debt

b) 20% sectoral equity, 60% diversified

equity, 20% long-term debt

c) 30% sectoral equity, 30% diversified

equity, 40% cash/ liquid investments.

d) 80% long-term debt, 20% medium term

debt

Workbook

Cumulative Fixed Deposit with them,

without any penalty and with all the

accumulated interest (compounded half

yearly). You had invested Rs. 4000 with

them 3.5 years back. If they are giving you

back Rs. 4985, what is the annualized rate

of interest you have earned?

new golf club on the fairway and the

head of the club flies off, and hit another

golfer who was standing 20 feet away.

b) Mr. Vishal takes medication that he

knows makes him drowsy and then

proceeds to drive. He gets into an

accident injuring the passengers in

another car.

c) Mrs. Jaya locks Ms. Rani in a room to

prevent her from leaving the building

d) Mrs. Priti experienced a sudden surge

of chest pain while driving, which causes

her to lose control of her car and hit

another car.

271. Any possible occurrence which may have

a negative financial implication, can be

plotted on a graph with X axis measuring

the frequency (low-high) and Y axis

measuring the financial impact (low-high).

You can view the classification in four

quadrants.

Quadrant I - Low frequency, Low Impact

Quadrant II - Low frequency, High Impact

Quadrant III - High frequency, High Impact

Quadrant IV - High frequency, Low Impact

It would not be practical to purchase

insurance for events falling in _________.

a)

b)

c)

d)

Investment Planning

Quadrant I & IV

Quadrant I, II & IV

Quadrant I, III & IV

Quadrant III

33

due in 2 years. Its value in today's market

is Rs. 900. Bond B has a 10% annual

coupon and is due in 4 years. It is priced

to yield 12%. Bond C is a 9% zero-coupon

bond priced to yield 11% in 8 years. The

yield to maturity of Bond A is closest to:

a)

b)

c)

d)

9.90%.

10.40%.

10.90%.

11.90%.

to yield 11% in 8 years. Assuming that the

duration of Bond A is 1.94 years, which of

the following statements about the effect of

a 1% decline in interest rates is true?

a) Bond C, having a longer duration than

Bond A, would have a larger percent

increase

b) The percent change in price of a bond is

independent of the duration of a bond.

c) It is not possible to determine the percent

change in price of Bond A versus Bond C

d) Bond A would have a greater percent

change in price than Bond C because it

has a shorter duration.

274. The new Senior Citizens Savings Bond

Scheme offers ________ % Interest.

8.5

9

9.25

8.75

in Public Provident Fund is Rs. _______.

a)

b)

c)

d)

70000

60000

80000

90000

Bank of India.

A. Bank Deposit Rates;

B. Bank Lending Rates;

C. Certificate of Deposit Rates

a)

b)

c)

d)

34

A

B

C

None

a)

b)

c)

d)

Equity Shares

Debt Mutual Funds

Property

Gold

available u/s 80DDB is Rs.___________.

in 2 years. Its value in today's market is

Rs.900. Bond B has a 10% annual coupon

and is due in 4 years. It is priced to yield 12%.

a)

b)

c)

d)

from Long Term Capital Gains tax subject

to certain conditions.

a) 40000

b) 45000

c) 50000

279. _________ is / are governed by SEBI.

a)

b)

c)

d)

Mutual Funds

Stock Brokers

Portfolio Managers

All of the above

Financial Planner after he/she passes

modules of the CFP Certification Course.

a)

b)

c)

d)

6

1

3

5

process is ___________.

a)

b)

c)

d)

Data gathering and goal setting

Establishing the Client Planner relationship

Plan Review

Rs.10000 to double if the rate of return is

9% p.a.?

a)

b)

c)

d)

e)

9.5

8.5

10

9

8

is 8% and the inflation rate is 5% the real

rate of return is _____.

a)

b)

c)

d)

e)

Investment Planning

3.5%

3.0%

2.86%

-3.0%

2.74

Workbook

borrowings in Mumbai is known as

a)

b)

c)

d)

MIBOR

MIBID

LIBOR

LIBID

unit holders of a mutual fund shareholders

is called a __________ relationship

a)

b)

c)

d)

Contractual

Fiduciary

Moral obligatory

None of the above

to earn higher commissions will render an

insurance agent to be held liable ________.

a)

b)

c)

d)

for professional misconduct

for professional negligence

under the SEBI Act

plan is one that _____________.

a) Restores asset holdings at the end of a

period to target weights.

b) Buys different kinds of securities in a

fixed proportion.

c) Pays out dividends in a constant ratio to

the portfolio's asset values.

288. As interest rates rise bond prices _____ and

the longer are their maturities the _______

is the price change.

a) Rise; lesser

b) Fall; lesser

c) Fall; greater

289. Which item below is not a met hod

recommended for acquiring securities?

a) Dividend reinvestment plans

b) Rupee cost averaging

c) Averaging alpha and beta weights

290. KM, Inc. has a beta of 1.5. The risk-free rate is

5%, and the market risk premium is 8%. Thus,

a) KM has a required return of 6.5% and

an expected return of 8%.

b) KM has a required return of 15.5%.

c) KM has a required return of 9.5%.

Workbook

a) A section of the NYSE where technology

stocks are traded.

b) The trading symbol for a racetrack

company listed on the NYSE.

c) The NASDAQ (acronym of National

Association of Securities Dealers

Automated Quotations) is an American

stock exchange.

292. An equity mutual fund has an NAV of Rs. 15

on January 1, 2006. You invest Rs. 15000 on

that day. You sell these units at an NAV of

Rs. 25 on January 15, 2007. The entry load

is 2.25% while the exit load is 0.50%. You are

in the 30% tax bracket. Your pre-tax return

on the same is _____%

a)

b)

c)

d)

66.66

62.18

46.66

42.18

choose an investment with a _______ IRR.

a.

b.

c.

d.

Lower

Higher

Equal

Data insufficient

mortgaged house. They are on the verge

of a divorce. The Housing Finance

Company will ___________

a) not interfere as long as the EMIs are

being paid on time.

b) repossess the house after divorce

c) insist on the house being transferred to

one of them.

d) mediate reconciliation between the

couple.

e) Increase the interest rate in order to

compensate for the increased risk.

295. Domestic GOI bond holders (holding them

up to Maturity) have to deal with _____ risk.

a)

b)

c)

d)

e)

Investment Planning

Volatility

Default

Inflation

Price

Currency

35

a) Borrowing at lower cost in order to pay

off higher cost debt

b) Repaying debt by selling off assets

c) Lending at a higher rate of interest

d) Securitizing your receivables

e) None of the above

297. ________________ Asset Allocation is not

a text book Asset Allocation Model.

a)

b)

c)

d)

e)

Tactical

Discretionary

Strategic

All of the above

None of the above

monthly, quarterly, and semi-annually, the

effective rates respectively would be _____.

a)

b)

c)

d)

6.16, 6.13, 6.09

6.10, 6.07, 6.03

6.11, 6.08, 6.06

interest payable annually) maturing 3 years

from today is available at a YTM of 5.8%.

Therefore the current price is ___________.

a)

b)

c)

d)

data.

a)

b)

c)

d)

e)

1, 3, 5, 4, 2.

5, 1, 3, 2, 4.

1, 5, 4, 3, 2.

1, 5, 3, 4, 2.

1, 4, 5, 3, 2.

between risk and expected return and that

is used in the pricing of risky securities is

better known as _________

a)

b)

c)

d)

CAPM

Security Market Line

Beta Model

below.

The stock of Maxi Limited performs

relatively well to other stocks during

recessionary periods. The stock of Taxi

Limited, on the other hand, does well during

growth periods. Both the stocks are

currently selling for Rs.100 per share. You

assess the rupee return (dividend plus price)

of these stocks for the next year as follows:

Rs.152.50

Rs.154.10

Rs.108.59

Rs.152.00

is known as a ____________ repayment.

a)

b)

c)

d)

Laddered

Step-Up

Step-down

Bullet

functions into the logical order in which a

professional financial planner performs

these functions.

1. Interview clients, identify preliminary

goals.

2. Monitor financial plans.

3. Prepare financial plan.

4. Implement financial strategies, plans,

and products.

36

303. Rs.1, 000 in the equity stock of Maxi Limited

a)

b)

c)

d)

Investment Planning

120.5

124.6

116.6

123.4

Workbook

a)

b)

c)

d)

301.4

322.6

291.4

296.8

Limited and Taxi Limited.

a)

b)

c)

d)

90.6

104.6

78.4

89.3

Rs.6802

Rs.6870

Rs.6878

Rs.6925

beginning of each year) for 5 years @ 5%

p.a. in a bank deposit. She then withdraws

the accumulated sum over a period of 3

equal annual installments. What is the value

of the deposit at the end of 5 years and the

quantum of withdrawal each year?

a)

b)

c)

d)

a) Rs.117591

b) Rs.119487

c) Rs.118274

For questions 310 and 311 Refer to the data

below:

Deposit today @ 8% p.a compounded

monthly. He hopes that this investment

will enable him to fund his college education

(estimated t o cost Rs.9000) which

commences after 4 years. What will be the

value of this investment in four years?

a)

b)

c)

d)

three years time for a one month trip to the

USA. Assuming she can get an 8% annual

return on her investments, compounded

quarterly, how much must she invest today

in order to achieve her goal?

Rs.28505, Rs.9954

Rs.29010, Rs.10656

Rs.29568, Rs.11054

Rs.28804, Rs.10042

from now. His investments are currently

worth Rs.50,000/- and he intends to

contribute Rs.10,000/- at the beginning of

every six months period to fund his purchase.

Assuming that the annual investment rate

of return is 8% compounded semi annually,

what will be the value of the investment in

five years time?

be his outgoings over the next few years:

End of Year Cash Outflow

Year 1 Rs.10000

Year 2 Rs.15000

Year 3 Rs.12000

Year 4 Rs.13500

Year 5 Rs.11000

310. If John wants to cater to these cash

outflows, how much should he have today,

assuming an annual rate of return of 5%?

a)

b)

c)

d)

Rs.54126

Rs.53221

Rs.52483

Rs.50483

debentures of Essar Oil on 1/1/94 at Rs.500

each. 40% of the value of the debentures is

convertible into one share of Rs.50 each

after seven years. Mr. John exercised his

option on 1/4/2001 and received 100 shares.

Compute the cost of acquisition of these

shares.

a)

b)

c)

d)

Rs.200

Rs.205

Rs.195

Rs.185

a) Rs.1,98,875

b) Rs.1,95,555

c) Rs.1,97,240

Workbook

Investment Planning

37

balance" may not be a feasible proposition

for many investors for the following reasons

EXCEPT for:

a) it may be difficult to achieve sufficient

diversification in the invested assets

b) it may be difficult to achieve a suitable

investment portfolio with the desired risk

reward relationship

c) it may be possible to consistently

outperform the investment returns

earned by an established life office

d) that the insurer offers capital guarantees

on cash values

313. An individual may prefer investment-linked

assurance to conventional assurance

policies for the following reasons EXCEPT

a) he has some direction over the

investment of his premiums

b) he is informed of the expenses charged

for the services provided

c) he is attracted by the guaranteed

surrender values offered under these

contracts

d) he prefers the switching facilities

available under such contracts

314. Which of the following does not constitute

a valid charge on the premiums paid for an

investment-linked life assurance policy?

a)

b)

c)

d)

bid-offer spread

front-end charges

recurrent fund related charges

surrender penalty

and are faced with the problem of suggesting

a suitable insurer for a client who is in very

good health. Assuming that a temporary

assurance policy is needed for this client,

you would recommend an insurer _______.

a)

b)

c)

d)

38

a lax underwriting policy

very few causes of death excluded

extensive causes of death excluded

insurer, in a costing exercise, must provide

for future anticipated improvements in

mortality

a)

b)

c)

d)

conventional endowment assurance

group life assurance

life annuities

severity is probably best handled by:

a) Self-insurance

b) Insurance

c) Avoidance

d) Transfer

318. 'Consideration' under the law is a return

promise to:

1.

2.

3.

4.

a)

b)

c)

d)

Do certain things

Abstain from doing certain things

Forbear some acts

Accept an offer

[1], [2], and [3] only

[1], [2], and [4] only

[1], [3], and [4] only

[2], [3], and [4] only

a) Any profit distributed to holders of life

policies who cash in those policies

b) Generally profit that will be distributed

on the same terms as the sum assured

c) A distribution of income to shareholders

d) Profit distributed to holders of unit-linked

policies

For questions 320 to 322 use the information

below :

A client of yours, who is now aged 35 years, states

that his retirement objective is to provide for himself

at retirement at age 55, annual incomes of 2/3 of

his last drawn salary. He further states that he

expects this income for 20 years after retirement.

His current annual salary is Rs. 60,000 and this

escalates at 6% per annum throughout his career,

with the annual escalations occurring on his

birthdays. Assume an 8% per annum interest rate

throughout.

Investment Planning

Workbook

a)

b)

c)

d)

Rs.128,285

Rs.181,536

Rs.192,428

Rs.132,000

corpus.

a)

b)

c)

d)

Rs.225,800

Rs.250,900

Rs.13,60,287

Rs.305,780

a)

b)

c)

d)

Rs.

Rs.

Rs.

Rs.

676774

776774

931095

609870

correlated assets is _____

must deposit until age 54, assuming that the

first is due now, to fund for the stated

retirement income.

a)

b)

c)

d)

7% where it was compounded annually for

the first 5 years and quarterly for the last

2 years. What did he receive on maturity?

a)

b)

c)

d)

a)

b)

c)

d)

Rs.22,800

Rs.25,965

Rs.28,890

Rs.30,389

Participating ordinary life policies with a sum

assured of Rs. 10,000 are issued by two

life assurance companies, Office 1 and

Office 2, to lives aged 35 with the following

cost data:

+1

-1

+0.5

-0.5

Inflation risk

Reinvestment risk

Default risk

wants to save for her higher education which

shall begin at age 21. Which investment

vehicle has the best potential for him to

attain his goals?

a)

b)

c)

d)

Derivative Instruments

GOI Bonds

Bank Fixed Deposits

Equity Mutual Funds

a)

b)

c)

d)

323. Based on the above information and

assuming a 6% per annum interest rate, the

annual surrender cost index for each

Rs.1,000 sum assured at the end of 20

years

a)

b)

c)

d)

Workbook

For Office 2 is greater than Office 1

For Office 1 is equal to Office 2

Is not determinable

Credit Card Debt

Holiday Loans

All of the above

a)

b)

c)

d)

Art market

Real Estate market

Fixed Income Market

Stockmarket

deduction must have a minimum tenure of

______ years

a)

b)

c)

d)

Investment Planning

3

4

5

6

39

u/s 54 EC

a)

b)

c)

d)

NHAI

NABARD

REC

Both (a) and (c)

of the Wealthy class as compared to the

Middle class.

a)

b)

c)

d)

Fixed Deposits

Mutual Funds

Equity Shares

Collectibles

a)

b)

c)

d)

Corporate entity

Partnership Firm

Association of Persons

None of the above

a)

b)

c)

d)

Low Book Values

Low Dividend Yields

Low Margin of safety

a) Currency with the public

b) Demand deposits with the banking

system

c) Other deposits with the RBI

d) Time Deposits with banks

40

__________.

a)

b)

c)

d)

Diversifiable Risk

Non-diversifiable risk

Both of the above

None of the above

a)

b)

c)

d)

Beta

Standard Deviation

Variance

Either (b) or (c)

a)

b)

c)

d)

Alpha

Beta

Gamma

Vega

a)

b)

c)

d)

Listed

Unlisted

Both (a) and (b)

Foreign

are that they ___________.

Upward sloping

Downward sloping

Flat

Humped

with __________

a)

b)

c)

d)

Discount rate

Repurchase Rate

Reverse Repurchase Rate

Prime Lending Rate

Personal Use

Investment

Near-Cash

None of the above

a)

b)

c)

d)

a)

b)

c)

d)

Equity

Gilt

Index

Liquid

a)

b)

c)

d)

other lending facilities can borrow short-term

funds from the central bank is called the

________.

b) all have terms to maturity that are 270

days are less.

c) all tend to have large amounts of

purchasing power risk.

d) are issued by corporates

345. One standard deviation means that an

observation will fall between the upper and

lower bound ______ % of the time.

a)

b)

c)

d)

Investment Planning

50.25%

68.30%

75.5%

95%

Workbook

known as ___________

a)

b)

c)

d)

Standard Deviation

Correlation coefficient.

Variance.

Level of confidence.

a)

b)

c)

d)

a)

b)

c)

d)

Correlation coefficient

Beta

Alpha

Sharpe Ratio

traded options are treated as _____ gains.

a)

b)

c)

d)

_______.

Speculative

Long Term Capital

None of the above

Holding period Return

Current Yield

None of the above

Sec. 80 C benefits have a lock-in period of

____ years.

a)

b)

c)

d)

2

3

4

5

choose an investment with a _______ IRR.

a)

b)

c)

d)

Lower

Higher

Equal

Data insufficient

b) The fact that they are traded on a

Collectible Exchange

c) The fact that they have the potential for

great capital appreciation.

d) The fact that common people can invest

in them.

_______.

measuring volatility of an investment.

rate is ___________.

a)

b)

c)

d)

Mean

Median

Standard Deviation

Variance

a)

b)

c)

d)

are reinvested at __________

a)

b)

c)

d)

The market rate of return

The prevailing PLR

The rate decreed by the RBI

the particular security is free from _______

risk.

a)

b)

c)

d)

Workbook

a)

b)

c)

d)

Option free instrument

Derivative instrument

Data insufficient

Linear

Convex

Random

Concave

Mutual Fund.

a) They primarily invest in securities issued

by the Central Government.

b) They primarily invest in longer dated

instruments.

c) They are not subject to Capital Gains

Tax if held for a period of over one year.

d) They are more volatile as compared to

liquid funds.

Default risk

Inflation risk

Reinvestment risk

Investment Planning

41

deviations from the mean, we term it as

________.

a)

b)

c)

d)

Standard Deviation

Variance

Semi-variance

Mode

sum of Rs.10000 to quadruple if the rate of

return is 9% p.a.?

a)

b)

c)

d)

Rs.1,10,000

Rs.1,13,451

Rs.1,15,000

Rs.1,11,500

A has an expected return of 20%. Company

B 10%. Company C 12% and Company D

9%. You have invested Rs. 40,000. What

more information is needed to find out the

return on the portfolio?

a)

b)

c)

d)

Proportion of investment

Market Value of the investments

None of the above

equal to ________

a)

b)

c)

d)

56

64

72

80

particular investment has a probability of

one potentially large loss as against several

potentially small gains.

a)

b)

c)

d)

42

Lognormal

Positively skewed

Negatively skewed

Normal

a)

b)

c)

d)

5.50

6.25

6.67

7.05

interest of Rs._____ at the end of one year,

if it earns 10% p.a. compounded every

month.

a)

b)

c)

d)

18

16

14

12

each month for 48 months. Her rate of return

is 8% p.a. The investment's value at the end

of the said period will amount to _______.

a)

b)

c)

d)

earnings yield is ______

2599

2617

2745

2799

earns Rs.10 p.a. as interest. His current

yield is ______ %

a)

b)

c)

d)

9.85

9.69

9.52

9.39

year for Rs. 90 and earns Rs. 5 per annum

as interest. His holding period yield is ____ %

a)

b)

c)

d)

15.85

16.67

17.25

18.19

income of Rs.100 and current value of

Rs.6,000. If the value of the market is

expected to rise to Rs.7200 by end of 3 years,

the approximate yield on the investment is

_______ %

a)

b)

c)

d)

7.25

7.58

7.85

8.02

related transactions can be carried forward

for upto _______ years.

a)

b)

c)

d)

Investment Planning

Speculative, 8yrs

Long Term Capital, 8yrs

Both (a) and (b).

Workbook

the risk curve. His Financial Planner

suggests that he invest in a Company Fixed

Deposit rated FB by CRISIL, which is

offering a yield of 300 basis points over the

FD rated FAAA. His advice is ________

a) Appropriate because Ram is able to earn

high interest.

b) Appropriate because Ram is low on the

risk curve.

c) Inappropriate because Ram is low on the

risk curve

d) Inappropriate because Ram can earn

even higher income by investing in a FD

rated FC.

372. Senior Citizens Bonds offer _____% interest

and are eligible for _______ tax deduction

a)

b)

c)

d)

Rs.11.00

Rs.12.50

Rs.10.00

Rs.10.50

years for Rs. 120 and earns Rs. 15 per

annum as interest. His YTM is _____ %

a)

b)

c)

d)

4.00

4.55

4.75

4.95

fund has risen from Rs.52 to Rs.62. The

fund was last quoted at Rs. 40, prior to the

announcement of the increase in the NAV.

If the fund were to trade at the same

discount to NAV, estimate the new price of

the fund?

a)

b)

c)

d)

Workbook

a) 9.1%

b) 8.5%

c) 10.0%

377. During the past five years, the returns of a

stock were as follows:

8.5, 80C

9.0, 80C

9.5, 80C

8.75, Nil

three for Rs.5 each. The present share price

is Rs.13. If the share price does not change

during the time of trading, what is the price

after the rights are taken up?

a)

b)

c)

d)

of ABC Ltd. The rate of return expectations

are as follows:

Rs.48

Rs.52

Rs.54

Rs.57

a)

b)

c)

d)

e)

Arithmetic mean

Geometric mean

Variance

Standard deviation

its stock of Rs. 6 per share. The following

year the dividend is expected to be the

same, increasing to Rs. 7 the year after.

From that point on, the dividend is expected

to grow at 4% per year indefinitely. Stocks

with similar risk are currently priced to

provide a 10% expected return. What is the

intrinsic value of M.A. Ltd.?

379. H. Pipes has issued a preferred stock that

pays Rs. 12 per share. The dividend is fixed

and the stock has no expiration date. What

is the intrinsic value of H. Pipes preferences

stock, assuming a discount rate of 15%.?

380. ABC Ltd. currently earns Rs. 45 per share

its return on equity is 20% and it retains 50%

of its earning (both figures are expected to

be maintained indefinitely). Stocks of similar

risk are priced to return 15%. What is the

intrinsic value of ABC Ltd's Stock?

Investment Planning

43

price of Rs. 16. What will be the future's price

if the risk free rate is 9 percent and the maturity

of the futures contract is 1 month?

382. Suppose a stock Index has a current value

of 3500. If the risk-free rate is 8 percent and

the expected yield on the index is 2 percent,

what should be the price of a six months

maturity futures contract ?

383. R.P. Singh owns a Rs. 1000 face-value

bond with three years to maturity. The bond

makes annual interest payments of Rs. 75,

the first to be made one year from today.

The bond is currently priced at Rs. 975.48.

Given an appropriate discount rate of 10%,

should R.P. Singh hold or sell the bond?

384. Poonam recently purchased a bond with a

Rs. 1000 face value, a 10% coupon rate,

and four years to maturity. The bond makes

annual interest payments, the first to be

received one year from today. Ramesh paid

Rs. 1032.40 for the bond.

standard deviation if Manoj invests 20% in

stock A, 50% in stock B and 30% in stock

C. Assume that each security's return is

completely uncorrelated, with the returns of

the other securities.

388. Consider two stocks, P & Q

negatively correlated.

What is the expected return of a portfolio

constructed to derive the standard of

portfolio return to zero?

389. The following information is available:

b) If the bond can be called two years from

now at a price of Rs. 1100, what is its

yield-to-call.

385. A Rs. 10,000 face-value bond with a tenyear term-to-maturity. Currently sells so as

to produce on 8% yield-to-maturity.

Calculate the bond's price if its yield rises

to 10%, if its yield falls to 5%.

386. At the beginning of the year, the Saturn fund's

NAV was Rs. 18.50. At the end of the year its

NAV was Rs. 16.90. At year-end the fund paid

out Rs. 1.25 in income and capital gains. What

was the return to an investor in the Saturn

fund during the year?

387. Manoj Kumar owns three stocks and has

estimated the following joint probability

distribution of returns:

and B?

b) What is the expected return and risk of

a portfolio in which A and B are weighs

of 0.6 and 0.4

390. Consider the following information for three

Calculate the treynor measure, sharp

measures, and Jensen measure for the

three mutual funds and the market index.

44

Investment Planning

Workbook

beginning of the year was Rs. 39,000. At

year-end, Vipul received a gift of Rs. 4,000,

which was invested in the portfolio. The

portfolio's value at year-end was Rs. 42,000.

What was the return on the Vipul's portfolio

during the year?

below.

Standard deviation of an asset 2.5%

Market standard deviation

2.0%

13.0%

portfolio

Correlation co-efficient of

portfolio with market

392.

395

The mean risk free rate was 10%.

Calculate Treynor measure, Sharpe

measure and Jensen measure.

For questions 393 and 394 Refer to the data

below :

The market portfolio has a historically based

expected return of 0.095 and a standard deviation

of 0.035 during a period when risk-free assets

yielded 0.025. The 0.06 risk premium is thought

to be constant through time. Risk less investments

may now be purchased to yield 0.08.

A security has a standard deviation of 0.07 and a

0.75 correlation with the market portfolio. The

market portfolio is new expected to have a

standard deviation of 0.035.

393. Market's return-risk trade off will be _____.

a)

b)

c)

d)

1

2

0.035

None of above

a)

b)

c)

d)

e)

Workbook

0.07

0.035

1

1.5

None of above

15.0%

0.8

a)

b)

c)

d)

1.25

0.8

10

1

be _______.

a)

b)

c)

d)

e)

13%

15%

14.6%

16%

None of the above

10%, expected return on the portfolio will

be ________.

a)

b)

c)

d)

10%

15%

12.5%

11.25%

below.

Sachin goes to Sanjeev, a CFP, for his capital

market investments. Sachin has regularly been

receiving dividend. His total income falls in the

highest tax slab. He has received bonus shares

and right shares from certain companies.

398. The benefit of indexation is available in

respect of transfer of __________.

a) Short-term capital Assets

b) Long-term Capital assets

c) Both short-term as well as long-ter capital

assets

d) Neither short-term nor long-term capital

assets

Investment Planning

45

a) Entire net sale consideration is taxed as

capital gain

b) Entire net sale consideration is not taxed

as capital gain

c) Capital gain will be reduced by the

proportionate cost of original shares

d) None of above

400. Sachin has renounced the right shares in

favour of his friend Sanjay @ Rs. 5 per

share. If Sachin wished, he could have

purchased the right share @ Rs. 25 per

share.

In respect of renouncement of right share:

a) Sachin is not required to pay capital gain

tax

b) There will be short-term capital gain @

Rs. 5 per share

c) There will be short-term capital gain @

Rs. 20 per share

d) None of above

401. If Sachin opts for indexation benefit in

respect of his listed securities. The resultant

capital gain will be taxed at

a)

b)

c)

d)

Slab rates

20% plus surcharge, if any

10% plus surcharge, if any

Maximum marginal rates

below :

Steve Waugh wants to be actively involved in

derivative trading soon after taking retirement from

cricket. He has no knowledge about this field and

has approached you for guidance.

402. Which of the following statement is true?

a) Price of an option is called as Premium

b) A short call is buying a call possibly with

the hope of selling it back later at lower

price

c) A short call is selling a call possibly with

the hope of buying it back later at a

higher price

d) A short call is selling a all possibly with

the hope of buying it back later at a lower

price

e) Both (a) & (d)

46

about future contracts?

a) Forward price are normally higher than

spot prices

b) Usually the position are marked to

market

c) Daily settlement takes places

d) Both (a) and (b)

e) (a), (b) as well as (c)

404. Intrinsic value is:

a) Difference between original and current

share price

b) Difference between original and strike

price

c) Difference between strike and current

share price

d) None of above

For questions 405 to 407 Refer to the data

below :

A bond has a face value of Rs. 1,000 & coupon

rate of 8%. The required rate of return is 6%.

405. What will be the value of bond if the bond is

perpetual?

a)

b)

c)

d)

Rs. 1,333

Rs. 1,000

Rs. 667

None of above

value of bond will be ___________.

a)

b)

c)

d)

Rs. 1,084

Rs. 1,000

Rs. 916

None of the above

return is 10%, the value of bond will be

__________.

a)

b)

c)

d)

Investment Planning

Decrease by Rs. 160

There will be no impact

Be Rs. 1,000

Workbook

of the following statement is not true?

a) Current yield includes only the coupon if

the security is sold immediately

b) Current yield includes both coupon and

capital gain/loss if the security is sold

immediately

c) YTM is the return an investor would

receive if the security were held to maturity

d) All are true

e) All are false

For questions 409 to 414 Refer to the data

below :

Parmar is a CFP, who wants to sharpen his skill

about mutual funds as he has taken up a business

in the last two years and has been totally out of

touch of this field. He now wants to again take up

his profession. But before that the wants to test

his knowledge about mutual funds.

409. Open ended funds __________.

a) are available for subscription throughout

the year

b) have a fixed maturity

c) can be bought and sold at NAV

d) all of the above are true

e) only (a) and (c) are true

410. NAV of one unit at a mutual fund is Rs. 11.

The entry load is 4%. The cost to the

investor would be ___________

a)

b)

c)

d)

Rs. 11

Rs. 11.44

Rs. 10.56

Rs. 11.88

a)

b)

c)

d)

High liquidity

High income

Security of investment

All are available

in Exchange Traded Funds?

a)

b)

c)

d)

e)

Daily/Real Time Portfolio Disclosure

Low cost intra-day trading possible

All of the above

(a) & (c)

on:

a)

b)

c)

d)

e)

Investment personnel

Investment philosophy & process

Past performance

All of above

(a) & (c)

below :

Your client has put all his money, so far, in financial

investments. Recently, his interest has arisen in

real estate investments. But he is treating it as

similar to investment in financial investments. You

explained him that real estate, as an investment

is different from investment in f inancial

investments. He wants to know more about real

estate as an investment.

415. Which of the following is true?

available to a person investing in mutual

funds?

a) control over actual investment

b) selection flexibility to invest or withdraw

funds

c) transparency

d) convenient administration

e) all are available

Workbook

in money market mutual funds?

income tax

b) Agricultural income is exempt from

wealth tax

c) Real estate investment is illiquid

d) All of above

416. Real estate market in India is ________.

a)

b)

c)

d)

Investment Planning

Highly organized

Disorganized

Is free from Government controls

Offers homogeneous products

47

a)

b)

c)

d)

ii)

High stamp duty rates

Obsolete tenancy and rental control laws

All of the above

below :

a)

b)

c)

d)

iii)

iv)

a)

b)

c)

d)

Only by cheque

Only in cash

Only by draft

Any of the above mode

a)

b)

c)

d)

Six years

Eight years

Six and a half years

Depends on the investor

6.5% RBI Saving bonds?

a)

b)

c)

d)

e)

Tax rebate u/s 88 is available

Interest is tax free

Interest is payable only at maturity

All of above

in the following five securities on 1.1.2004.

The number of shares bought, purchase

price and the expected price on 31.12.2004

are shown in the table below:

25%

28%

17.5%

33.3%

equals the return on the portfolio?

a)

b)

c)

d)

25%

28%

18%

30%

a)

b)

c)

d)

as they offer higher interest rates. However, he does

not know about other intricacies of these schemes.

418. NSC can be purchased:

security A?

15%

17.25%

18.5%

26.75%

equities, bonds and real esate. The

standard deviation are 0.1689, 0.0716 and

0.0345 respectively. The coorelations are

0.45 for equity and bonds, 0.35 for equity

and real estate, 0.2 for bonds and real

estate.

Find out standard deviation of the portfolio,

if the weights are 25%, 50% and 25%

respectively.

a)

b)

c)

d)

6.5%

3.25%

6.10%

8%

423. Assume that the proportions of investments

are 20% 35% and 40% what is the risk of

the portfolio?

i.

ii.

iii.

iv.

9.5%

9%

8%

6.4%

owned securities that had the following

annual rates of return:

i)

portfolio now?

a)

b)

c)

d)

48

27%

22%

13.5%

8%

Investment Planning

Workbook

the following measure?

i)

v)

a)

b)

c)

d)

a) Security A

b) Security B

c) Both are equally preferable

ii)

a) Security A

b) Security B

c) Both are equally preferable

stocks and bonds?

+0.34

-0.43

+0.43

-0.1452

the following expected returns and standard

deviations. The proportion of holding is also

indicated.

probabilities of each of the five economic

scenarios:

i)

correlation between securities is +1.0?

a)

b)

c)

d)

ii)

i)

a)

b)

c)

d)

ii)

a)

b)

c)

d)

iii)

9%

10%

1.9%

3.0%

29.44%

28.34%

25.44%

17.95%

a)

b)

c)

d)

Workbook

17.96%

14.56%

9.7%

15.71%

correlation between securities is -1?

a)

b)

c)

d)

12%

18%

15%

6%

Company A has an expected return of 20%,

Company B 10%, Company C 12% and

Company D 9%. You have invested Rs.

40,000.

i. What more information is needed to find

out the possible return on the portfolio?

a)

b)

c)

d)

iv)

20%

25%

15.8%

13.2%

12%

18%

15%

6%

a)

b)

c)

d)

beta of the shares

proportion of investment

none of the above

weighted, what is the return on the

portfolio?

a) 12%

b) 10%

c) 12.75%

d) 11.5%

Investment Planning

49

market price is 100. The possible selling

prices at the end of a year and the

probabilities are:

iii.

37, what would you decide?

a) Buy and hold the share

b) Advise your friend to sell the share in

the market

with a 10 year maturity, a 1000 par value, a

10% coupon rate and semi annual interest

payments.

i.

end of the year?

a)

b)

c)

d)

ii.

8%

12%

10%

11%

returns?

a)

b)

c)

d)

the next 3 years.

a)

b)

c)

d)

ii.

that the share price would be 34.73. What

is the present value of this expected price?

Your opportunity cost remains 12%.

a)

b)

c)

d)

50

6

4

5.28

4.1

24.72

31

32.

29

YTM of the bond is 6%. At what price

(approximately) the bond would sell in the

market?

a)

b)

c)

d)

ii.

10.55%

10.6%

10.9%

10.95%

company that paid a dividend of Rs. 2. You

expect the dividend to grow at the rate of

5% per year for the next 3 years. If your

holding period is 3 years and opportunity

cost is 12%, find out (assume the present

dividend is not received).

i.

i.

Rs.1100

Rs.1200

Rs.1232

Rs.1300

rises to 12%, what would be the

approximate market price of the bond?

a)

b)

c)

d)

Rs.900

Rs.850

Rs.953

Rs.800

and its sales are declining in recent years. Its

cost of mining is on the increase. Because of

these reasons, the company's earnings are

declining and dividends are expected to fall

constantly @ 5% per annum. Current dividend

is 5 and the discount rate is 15%.

i.

a)

b)

c)

d)

ii.

Rs.20

Rs.21.25

Rs.23.75

Rs.24.25

circumstances would you recommend

buying of 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 of the above

Investment Planning

Workbook

expect it to pay dividends of 1.07, 1.1449

and 1.2250 in years 1, 2 and 3 respectively.

You also expect to sell it for the price of

26.22 at the end of 3 years. From this

information,

i.

ii.

portfolios having following characteristics.

10%

12%

11%

9%

portfolio is 15%. Standard deviation of the

market is 6%.

i)

Yield on 1 year T-bill is 8%. If market portfolio

is expected to yield 13% during the year, what

is the expected return on stock A?

a)

b)

c)

d)

12%

14%

15.5%

17%

ii)

12%

13%

16.5%

17%

Workbook

.2%

.3%

.4%

.-5%

1.33%

1.83%

1.38%

1.53%

a)

b)

c)

d)

4.5

2.5

6

6.5

settlement system.

was the residual error?

a)

b)

c)

d)

portfolio?

a)

b)

c)

d)

a)

b)

c)

d)

iii)

a) Fund A

b) Fund B

2%

5%

3%

4%

share A and B.

ii)

0.433

0.533

0.563

0.536

at the end of the holding period?

a)

b)

c)

d)

i)

for fund B?

a)

b)

c)

d)

5%

6%

8%

7%

a)

b)

c)

d)

iii.

i.

a)

b)

c)

d)

ii.

The risk free rate is 8%. Average return on

fund A is 18% and fund B is 16%. The

standard deviation is 20% and 15%

respectively.

i)

transaction made on a particular day

necessarily results in delivery after a fixed

number of days.

a) True

b) False

Investment Planning

51

ii)

T+5 settlements.

ii)

a) True

b) False

iii)

a)

b)

c)

d)

system to rolling settlement was facilitated

by which of the following?

a)

b)

c)

d)

Dematerialisation

Electronic fund transfer

Both (a) and (b)

None of the above

ii)

ii)

8

10

12.8

15

0.1775

0.820

0.5795

1.01

iii)

0.70

1.70

0.72

1.27

prospective) be if the P/E of the companies

in the same industry is 20?

a)

b)

c)

d)

a)

b)

c)

d)

be?

a)

b)

c)

d)

a)

b)

c)

d)

index rises

index remains steady

futures positions required payment of

MTM margin.

Company has just announced its sales

forecast for the year 2004-14,40,000. If its

net income margin is likely to be 5% and

there are 100,000 equity shares outstanding.

i)

i)

index futures and the market prices rise as

expected, which of the following happens?

14

34

14.4

25.4

the expected dividend payment is 0.10 per

share, what is the holding period return?

gift from his mother-in-law. The money will

be received in a month's time. He plans to

invest 50% of his gift in shares. Recent trends

in the share prices indicate that the share

prices may go up. Impending elections may

dampen the spirit of investors and also if the

new government decides to adopts a stringent

economic policy. Based on the information

given above what should Ram do,

simultaneously sold a 70 call at 2 (lot size =

100). From this information, find out the

following:

i)

i)

in stock prices (when the money is not in

his hands)?

a) Buy stocks from spot market by

borrowing money

b) Buy long index futures/option

c) Short sell index futures

d) None of the above

52

a)

b)

c)

d)

54%

45%

33.33%

25%

a)

b)

c)

d)

Investment Planning

Rs.64

Rs.66

Rs.62

Rs.60

Workbook

ii)

this spread?

a)

b)

c)

d)

iii)

Rs.300

Rs.800

Rs.200

Rs.1100

a)

b)

c)

d)

Rs.400

Rs.300

Rs.200

Rs.100

iii)

a)

b)

c)

d)

of the scheme on a daily basis, so that

you can invest and disinvest everyday.

b) You will be in a position to trade on the

units intra-day as NAV is available on

real time basis.

c) You will be in a position to sell units of

what had been bought yesterday, i.e., a

buy today and sell tomorrow trading

system

d) None of the above.

SEBI through a stock exchange of which

he is admitted as a member.

a) True

b) False

ii)

redressal of grievances of the investors as

it is the responsibility of brokers.

a) True

b) False

iii)

member of more than one stock exchanges.

ii)

iii)

a) by physical delivery

b) in cash

c) gains/losses are settled in cash and the

contract value by physical delivery

d) none of the above

The option contracts have a trading cycle

of _________

Workbook

4 months

6 months

2 months

3 months

exchange, the issuer is generally not

involved in purchase/resale of units.

i)

a)

b)

c)

d)

Hedging

Arbitrage

Both (a) and (b)

None of the above

a) True

b) False

to Index option trading on the stock

exchanges in India:

ii)

a)

b)

c)

d)

a) True

b) False

i)

European style options

Yankee options

None of the above

make investment in Exchange Traded

Funds. With reference to this, you are asked

the following:

i)

considered in valuation of unlisted share?

a)

b)

c)

d)

ii).

Capitalisation rate

liquidity

Dividend payments

company is not available, the unlisted

shares are valued _____________.

a)

b)

c)

d)

Investment Planning

at

at

at

at

25% of its fair value

0% of its fair value

90% of its fair value

53

iii)

basis of:

a)

b)

c)

d)

Yield to maturity

Market value

Cost basis

Convertible portion like equity instrument

and non-convertible portion as debt

instrument

iv)

a) True

b) False

v)

investors. They offer withdrawal,

reinvestment, switchover facilities etc.,

i)

a periodic basis a specified amount from

one scheme to another within a same fund

family is called __________.

a)

b)

c)

d)

ii)

borrowing by mutual funds.

i)

ii)

Banks

Non-banking financial institutions

Mutual funds

All of the above

iii)

in the opinion of the trustees, requires

the scheme to be wound up

b) If 75% of the unit holders of a scheme

pass a resolution that the scheme to be

wound up

c) If the board so directs in the interest of

the unit-holders.

d) Any of the above

derivatives for the purpose of hedging,

portfolio balancing and speculation.

a) True

b) False

54

ii)

securities, subject to the approval of Board,

with out any investment cap or ceiling.

correct?

up, after repaying the amount due to the

unitholders ___________.

securities lending.

a) True

b) False

Not exceeding three months

Not exceeding six months

For any period

by mutual funds

b) Temporary liquidity needs can be met

through borrowings

c) Corpus can be increased through

borrowing

d) Time limit is specified for the borrowing

and repayment.

a) True

b) False

ii)

_________

a)

b)

c)

d)

benefits of diversification especially to small

investors. Which of the following statements

about mutual fund investments are correct?

i)

scheme of same asset management

company.

a) True

b) False

Systematic withdrawal plans

Automatic reinvestment plans

Systematic transfer plans

percentage of value of the holding in mutual

funds units. Loans against the units can not

be availed from __________

a)

b)

c)

d)

mutual funds invest in unlisted security of

an associate or group company of sponsor.

of its scheme if ____________

a) the asset management company fully

guarantees the return.

b) the sponsor fully guarantees the return

c) both (a) & (b) are true

d) Mutual fund can not guarantee any return.

Investment Planning

Workbook

in Public Provident Fund, which is a popular

savings cum tax saving instrument.

i)

correct?

a) Non-resident Indians can not open an

account

b) Continuance of an existing PPF account,

opened at a time when the account

holder was resident, will be allowed.

c) Subscription to an existing PPF account,

opened at a time when the account

holder was resident, will be allowed on

repatriation basis

d) Hindu Undivided Families can open PPF

account.

ii)

indicate the correct ones.

a) In case of join nominations, it is not

possible to allocate the percentage of

benefits to each nominee.

b) The PPF account can be extended only

when the account holder continues the

contribution

c) Balance in PPF account is not subject

to attachment by Income Tax authorities

d) None of the above.

remote, rural area where you have a hunch

that the national high way would come up

in the vicinity and the place would be a

township preferred by Business Process

Outsourcing (BPO) entrepreneurs. What is

this category of real estate investment?

a)

b)

c)

d)

ii)

iii)

ii)

in the bonds

a) True

b) False

iii)

a) true

b) false

Workbook

1956 no tax liability on excess of capital

gains on sale of old house over the cost of

financing new house which is purchased/

constructed as per the conditions stipulated.

a) True

b) False

iv)

provide the perpetual right to occupation or

right to use for a set time or period each

year for certain term.

a)

b)

c)

d)

a) True

b) False

computing the capital gains realized on sale

of land or house property held for not more

than 36 months.

a) True

b) False

bonds.

i)

development investment

speculative investment

both (b) and (c)

Lease

Mortgage

Time share

Lien

institution, Mr. X invests money in short-term

money market instrument, fixed and floating

interest securities, equity and preference

shares and bank and corporate deposits.

i)

useful in managing interest rate risks?

a)

b)

c)

d)

Investment Planning

Interest Rate Swaps

Commercial Paper

Both (a) & (b)

55

ii)

a)

b)

c)

d)

Secured loans

Unsecured loans

Long term investment

Carries no interest

have just concluded a business deal and

received an advance of 10 lakhs. You would

require the money for the commencement

of operations and other payments by 1st

April 2004. You are told that the funds can

be parked in commercial paper (CP) which

would give a better return compared to

deposit in banks.

i)

ii)

a)

b)

c)

d)

iii)

the CP?

a)

b)

c)

d)

iii)

i)

ii)

a)

b)

c)

d)

e)

____________.

a) interest rate and maturity for a asset of

bearing bonds

b) interest rate and maturity for a set nonconvertible bonds

c) interest rate and inflation for a set of noninterest bearing bonds

d) inflation rate and maturity for a set of

interest bearing bonds

e) None of the above.

Issuing companies

SEBI

RBI

Banks

by various factors. These factors are broadly

classified in to economic factors and noneconomic factors.

i)

on 15.3.2003. He received interest from the

security on 1.1.2003. The consideration of

sale received by X would _________.

used measure for bond valuation.

CPs are unsecured instruments

CPs are liquid instruments

CPs are not bought back.

a)

b)

c)

d)

par

discount

premium

none of the above

date of last interest payment till date of

sale

b) be inclusive of accrued interest till the

date of sale

c) as the security is sold, Y will be receiving

the future interest and no portion of it

will be shared with X

d) interest amount will be shared equally

between X and Y.

a) no maturity

b) short maturity but generally rolled over

for a fairly long period

c) fixed maturity

d) fixed maturity but for more than a year.

ii)

be a situation where there is a price gap

between new and existing securities traded

in the market place. When the yield exceeds

the return from the coupon payment alone,

the security is said to be traded at ______.

ZCYC is ____________.

a) useful for estimating the credit risk

b) useful for estimating the premium to be

charged for default risk

c) used as benchmark yield for risk free

securities

d) both (b) & (c)

Inflation Rate

Current Account Deficit

Currency movements

Only (a) & (b) and not (c)

(a), (b) and (c)

iii)

a) True

b) False

56

Investment Planning

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Income Securities, like equities, is known

as primary market. The secondary market

deals with securities already issued.

i)

issued through _________.

a)

b)

c)

d)

ii)

Rs.

Rs.

Rs,

Rs.

1,00,000

1000

10,000

100

a) Holding of investment in government

securities in electronic form.

b) A facility provided by the RBI.

c) Necessary for Financial Institutions,

Banks, Intermediaries like Primary

dealers and NBFCs to deal in government

securities.

d) All of the above

iv)

of an infotech company and you are afraid

that the prices would decline. What would

be your strategy to protect the value of your

portfolio?

a)

b)

c)

d)

ii)

Buy a put option

Buy futures

None of the above

hedged with call option? In that case, what

would you do?

a)

b)

c)

d)

Workbook

Having the securities and no options

Holding securities and writing the call

Holding securities and writing the put

refers to _________

a) No derivative instruments in portfolio

b) Having the securities and equivalent

derivative instruments

c) Holding securities and buying the call

d) Only call or put or futures open position

securities. This is riskiers and is the reason

why mutual funds and financial institutions

are not allowed t o engage in these

transactions. Suppose you, an individual,

expect that the market would decline, are

tempted to sell some overvalued shares at

the existing level without owning them.

i)

you would be in a position to benefit from

the transactions?

a) When the index gains on the next day

and the exchange follows T+1 settlement

system

b) When the index declines after 3 days and

the exchange follows T+1 settlement

system

c) When the index declines after a week

and the exchange follows T+3 settlement

system

d) None of the above

involved in holding an investment. There are

different instruments available for hedging

and risk management.

i)

a)

b)

c)

d)

primary market in case of government

securities is ___________.

a)

b)

c)

d)

iii)

Public issue

Private placement

Tender/Auction

Any of the above

iii)

ii)

derivatives is less riskier than selling short.

What would be your strategy to benefit from

your expectations?

a)

b)

c)

d)

e)

Write a call

Write a put

Long call

Long put

Either a or d

Sell Call option

Hedging through call option not possible

Hedging requires a combination call and

put options.

Investment Planning

57

iii)

market decline, which of the following would

be suitable?

a)

b)

c)

d)

e)

Derivatives on stocks

Derivatives on Index

Exchange Traded Funds

All except (a)

All except (c)

It is important that the interests of small

investors in mutual fund schemes are

protected. Mutual fund structure takes into

consideration this aspect.

i)

a)

b)

c)

d)

iii)

Maximum 40%

Minimum 40%

Maximum 75%

Minimum 25%

fund at the time when the units are offered

to public, what is the disinvestment avenue?

58

Stock Exchanges

Repurchase facility offered by the fund

(a) and (or) (b) above

None of the above

max (0, S-X)

Min(0, X-S)

Min(0, S-X)

max (0, X-S)

max (0, S-X)

min (0, X-S)

min (0, S-X)

a)

b)

c)

d)

No Intrinsic value

Both time and intrinsic value

No time value

correct with regard to futures transactions.

i)

of mutual funds from which you can choose

and park your investible funds. It is desirable

to read the offer document to know the

salient features of the schemes before

committing the funds.

a)

b)

c)

d)

a)

b)

c)

d)

iii)

SEBI

Board of Trustees

Sponsors

net worth of asset management company?

a)

b)

c)

d)

i)

i)

a)

b)

c)

d)

Real Estate Funds

Equity Funds

Index Funds

nuance of option valuation. It will be useful

to trade, hedge or arbitrage in options.

ii)

SEBI Act, 1992

Indian Trust Act, 1882

All of the above

measure performance in case of _______

a)

b)

c)

d)

applicable to Mutual funds in India?

a)

b)

c)

d)

ii)

ii)

_______.

a)

b)

c)

d)

ii)

leveraging exposure

cash flow management

portfolio substitution

benefit from premium payments

________.

a) Payment of initial margin

b) Payment of mark to market margin

c) Payment of premium

iii)

can be placed with the brokers/trading

members as per their requirements?

a)

b)

c)

d)

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orders based on price conditions

both (a) and (b)

None of the above

Workbook

investor. Following are some questions based

on the taxation aspects of investment.

i)

iii)

iii)

i)

by ____________.

a)

b)

c)

d)

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Securities Appellate Tribunal

Department of Economic affairs

All of the above

price which may be payable by progressive

amounts is known as __________.

a)

b)

c)

d)

ii)

India and has statutory powers for protecting

the investors and promoting the

development of securities market. The

following questions address the aspects of

regulations in the Indian scenario.

i)

Standard of disclosure in public

Underwriting of issues

All of the above

two commonly found type of the companies

in any country. Former manages with the

resources available with them the latter has

outside funding in its balance sheet.

of the original holder is __________.

a) equal to the offer price of the rights share

b) nil

c) will be taxed as long term capital gains

if the sale price exceeds the cost price.

d) None of the above

regulations regarding ____________.

a)

b)

c)

d)

a) Cost of acquisition of bonus shares is

nil

b) Cost of acquisition of bonus shares is

equal to the market value of share on

the date of allotment.

c) Expenditure incurred on transfer of

shares is excluded in full value

consideration computation

d) None of the above

government securities that are traded on the

stock exchanges are regulated by _______.

a) Reserve Bank of India in consistent with

the guidelines issued by SEBI

b) SEBI in consistent with the guidelines

issued by SEBI

c) Companies Act

d) Department of Company Affairs

a) Value spent for acquiring the investment

b) Value spent on acquiring the investment

plus the capital expenses incurred for

acquisition

c) Value spent on acquiring the investment

minus the capital expenses incurred for

acquisition

d) Value spent for acquiring the investment

plus depreciation

ii)

ii)

Application money

Allotment money

Calls

None of the above

liable for _____________.

a) The paid amount of capital in that

company

b) The assets of the limited company

c) The debt of the company if his shares

are fully paid-up.

d) The goodwill of the company

iii)

of shares are held by the parent which also

exerts some influence in the activities is

known as _____________.

a)

b)

c)

d)

Investment Planning

Partly owned subsidiaries

Associated companies

Unlimited companies

59

466. Covered call writing is a strategy by riskaverse investors. Consider an investor who

writes a covered call on XYZ share. Spot

price is 38, exercise price is 40 and 3 month

writing call on XYZ share is traded at 3.

i)

this strategy?

a)

b)

c)

d)

iii)

2

4

5

0

a)

b)

c)

d)

i)

60

ii)

a)

b)

c)

d)

5.3%

14.3%

8.57%

2.63%

a) when the stock price is between 88 and

76

b) when the stock price is between 73 and

92

c) when the stock price is either 73 or 92

d) none of the above

Hedger is a trader

a) who enters derivatives market in order

to reduce a pre existing risk.

b) Hedger is a trader who enters derivatives

market in anticipation of a need in the

near future.

c) Whose net wealth change, at the time the

derivative contract expires, is expected to

be zero. (Perfect hedge assumed).

d) All of the above

5.3%

14.3%

8.57%

2.86%

the same expiration date and the same

underlying. An investor has a call with an

exercise price of 85 and a put with an

exercise price of 80. The call price is 3 and

put price is 4.

the straddle buyer will exercise the put

the straddle seller will deliver the stock

none of the above

speculators and arbitrageurs trade.

i)

the investment in shares alone (assume that

no calls is written)?

5

3

7

0

a)

b)

c)

d)

the share price rises to 42?

a)

b)

c)

d)

iv)

iii)

38

35

41

37

strangle, what would be the profit it the

share price is 83?

a)

b)

c)

d)

the time of investment?

a)

b)

c)

d)

ii)

ii)

assumes risk for profit

does not incur losses at all

has a long position in cash market and

long position in derivatives market.

companies coming out with issues take the

book building route.

i)

a) allows the underwriter to retain a portion

of the oversubscription in the book

building route

b) is refund of money when the issue in

undersubscribed

c) acts as a balancing factor and stabilize

the prices

d) both a & c

Investment Planning

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ii)

pricing as per market conditions when the

book building is done as per floor price route

ii)

a)

b)

c)

d)

a) True

b) False

iii)

is one _____________

a) who applies for 1000 shares to applications

for shares worth Rs. 10000 or less

b) who applies for 1000 shares to applications

for shares worth Rs. 50000 or less

c) who applies for 1000 shares to application

for shares worth Rs. 25000 or less

d) None of the above

take Rs. 50,000 in savings out of the bank

and invest it in a portfolio of stocks and

bonds; Rs. 20,000 was placed into common

stocks and Rs. 30,000 into corporate bonds.

A year later, Ray's stock and bond holdings

were worth Rs. 25,000 and Rs. 23,000

respectively. During the year Rs. 1,000 cash

dividends was received on the stocks and

Rs. 3,000 in coupon payments was received

on the bonds. The stock and bond income

was not reinvested in Ray's portfolio.

i) Find out the return on Ray's stock

portfolio during the year.

ii) What was the return on Ray's bond

portfolio during the year.

iii) Find out the return on Ray's total portfolio

during the year.

iii)

iv)

a)

b)

c)

d)

Workbook

20%

17.21%

2%

13.51%

28.57%

33.33%

40%

20%

a)

b)

c)

d)

21.19%

17.48%

19.16%

10.96%

same industry.

i)

a)

b)

c)

d)

ii)

0.3

0.55

0.12

0.22

a)

b)

c)

d)

iii)

10.71%

12%

11.32%

13%

a)

b)

c)

d)

following portfolio:

i)

600

343

182

273

investment propostions?

The current market price is rs. 25. Under

market estimation with a growth factor of 11%

and a discount rate of 15%; and in reality, with

a growth factor of 7% and a discount rate of

15% how is the share rated, over-priced or

under-priced, to be sold or bought?

a) Sell

b) Buy

Investment Planning

61

with a face value of Rs. 1,50,000. It has 125

days to maturity and the market value today

is Rs. 1,44,231.

a)

b)

c)

d)

9.85%

12.1%

11.7%

10.5%

mutual funds are given below:

interpret the results of Jensen, Treynor and

Sharpe index.

476. Ashwin Yadav proposes to purchase a

property for giving it on rent. (Ignore taxation

and gearing). He expects to receive Rs. 55,000

in net receipts each year for six years and to

sell the property for Rs. 8,50,000 at the end of

the six year period. If the expected return is

15% what would be the value of the property?

a)

b)

c)

d)

i)

and B?

ii)

iii)

Portfolio for equal investment.

______ as the periods of compounding

increase

a)

b)

c)

d)

Increases

Decreases

Remains same

Decreases for some time and then

increases

e) Data insufficient

481. The term Efficient FrontierIn is contained

in___________.

a) Technical Analysis

b) Modern Portfolio Theory

c) Value Investing Theory

Rs.8,00,000

Rs.7,56,700

Rs.5,75,625

Rs.4,48,678

with an estimated net income of Rs. 1,25,000

at a market yield of 12%, calculate the value of

the property on capitalization approach.

a)

b)

c)

d)

the data given below:

Rs.10,42,000

Rs.12,56,000

Rs.9,88,888

Rs.8,98,850

to the concept of ______ AUM calculation.

a) Monthly average

b) Month end

c) Fortnightly average

483. An Asset Management Company must have

a minimum corpus of Rs. _______crores.

below, compute the risk on the portfolio.

a)

b)

c)

d)

5

15

25

10

Distribution tax on dividends.

a) Equity

b) Index

c) Debt

62

Investment Planning

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eliminate ___________ risk.

scenarios:

a) Systematic

b) Unsystematic

486. Classifying an investment as a long term

investment depends primarily on;

a) the length of time the investor expects

to hold the investment

b) the amount of the investment

c) whether a liquid market exists for selling

the investment.

487. In India Futures contracts in ______ may

be settled by delivery.

a)

b)

c)

d)

1.8, 0.60

25, 0.75

1.5, 0.25

2.2, 0.5

a) Commodities

b) Stocks

c) Stock Index

488. Mr. A deposits Rs. 10,000 in his own PPF

account and same amount in his wife's

account. How much maximum amount can

be deposit in his newphew's name?

a)

b)

c)

d)

Rs. 20,000

Nil

Rs. 70,000

Rs. 60,000

coupon rate will mature after 7 years. Find

the value of the bond if the discount is 8%.

a)

b)

c)

d)

a)

b)

c)

d)

1.33, 0.04, -4.25

1.10, 0.15, -3.75

1.46, 0.09, 3.75

portfolio. Details as given below. Calculate

the expected return of the portfolio.

109.85

110.41

108.75

110.60

What is the duration?

a)

b)

c)

d)

Sharpe and Jensen measures.

2.88 years

2.55 years

3.16 years

1.35 years

expected rate of return of a portfolio.

The dividend next year is expected to be

Rs. 4.00. Required return on the stock is

12%. Find the expected growth rate under

the Constant Growth model.

a)

b)

c)

d)

Workbook

2.00%

2.25%

1.90%

2.75%

Investment Planning

63

portfolio during the period?

Risk-free rate of return 8%

Expected rate of return on market portfolio

16% Beta of a security 0.7

i) Find out the expected rate of return of

the security

ii) If another security has an expected

return of 20% what must be its beta?

497. Calculate the expected rate of return of a

portfolio from the given information.

Risk-free rate of interest 8%.

Expected return of market portfolio 18%.

Standard deviation of an asset 2.8%.

Market standard deviation 2.3%.

Correlation co-efficient of portfolio with

market 0.8%.

Standard Deviation of 40%. XY Ltd. has an

expected return of 24% and Standard

Deviation of 38%. VV has a beta of 0.86

and XY has a beta of 1.24. The correlation

coefficient between the return of VV and XY

is 0.72. The Standard Deviation of market

return is 20%.

i. Is investing in XY better than investing

in VV?

ii. If you invest 30% in XY and 70% in VV,

what is your expected rate of return and

portfolio Standard Deviation?

iii. What is the market portfolios expected

rate of return and how much is the riskfree rate?

iv. What is the beta of portfolio if VV's weight

is 70% and XY's weight is 30%?

498.

ii) Assuming perfect correlation, analyse

whether it is preferable to invest 75% in

security A and 25% in security C.

499. Stocks A and B have the following historical

returns:

B. Calculate the following.

i. The average rate of return for each stock

during the period 2000 through 2004.

ii. What would be the realized rate of return

on he portfolio in each year from 2000

through 2004?

64

Investment Planning

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Answers

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65

Answers

66

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Answers

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67

Answers

68

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Answers

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Investment Planning

69

Explanatory Answers

1. Ans, [c].

35.

Ans, [c].

2. Ans, [d].

36.

Ans, [d].

3. Ans, [a].

37.

Ans, [e].

4. Ans, [d].

38.

Ans, [d].

5. Ans, [d].

39.

Ans, [b].

6. Ans, [a].

40.

individual asset x probability)

Ans, [b].

41.

Ans, [e].

42.

dividend) Next year dividend = 3.85 x (1.07)=4.1195

40 = 4.1195 / (r-.07) Solving for r gives 17.298

Ans, [d].

43.

Ans, [c].

44.

Ans, [b].

45.

Ans, [a].

46.

Ans, [b].

47.

value (50 x 100)= Rs. 5300

While the actual market value on the date of exercise is

(57 x 100)= Rs 5700 , which leaves a profit of Rs. 400.

Ans, [b].

48.

of B is (35 x 500) = 17500

Exercise price after 6 months for five hundred shares

of B is (45 x 500) = 22500

Profit in put option is (22500 3000) = 19500,

Rs 3000 is the premium paid for put option.

Value in put option is 19500 17500 = Rs 2000.

Ans, [a].

49.

Ans, [c].

50.

to go with market price which is higher. But he loses the

money paid in form of premium ie Rs 225.

Ans, [a].

51.

the buyer would prefer to buy in market than to

exercise the option. Which leaves the call writer with

the profit of premium collected ie Rs 625.

Ans, [a].

52.

Ans, [b].

53.

Ans, [d].

54.

Ans, [a].

55.

Ans, [c].

56.

Ans, [a].

7. Ans, [d].

8. Ans, [d].

9. Ans, [d].

10. Ans, [c].

11. Ans, [a].

12. Ans, [d].

13. Ans, [b].

19. Ans, [b].

20. Ans, [a].

21. Ans, [a].

22. Ans, [a].

23. Ans, [a].

24. Ans, [b].

25. Ans, [b].

28.

equity portion to be 3lacs. So the ROE is 10%.

Ans, [c].

29.

is twice the book value so it is 100.

Ans, [b].

30.

Ans, [d].

31.

hedging.

Ans, [b].

32.

Ans, [a].

33.

Ans, [d].

34.

Ans, [d].

70

Investment Planning

Workbook

57.

Ans, [b].

96.

Ans, [e].

58.

Ans, [a].

97.

59.

Ans, [a].

60.

Ans, [a].

61.

Ans, [c].

62.

Ans, [a].

63.

Ans, [b].

portfolio, because it is diversified, should be highly

correlated and move with the market. An index option

also moves with the market and, therefore, would

be a good hedge vehicle. A put should be used,

because it will increase in value if the market should

decline, thereby offsetting any losses on the portfolio.

Ans, [c].

64.

Ans, [c].

98.

65.

Ans, [e].

66.

Ans, [a].

Standard Deviation of Portfolio (0.19 - 0.08). 0.47826

= 0.23.

Ans, [c].

67.

Ans, [c].

99.

68.

Ans, [c].

69.

Ans, [d].

is equal to one, the standard deviation for the

portfolio will be lower than the weighted average

standard deviation for the portfolio.

Ans, [d].

70.

Ans, [b].

71.

Ans, [a].

72.

Ans, [c].

73.

Ans, [a].

74.

Ans, [e].

75.

Ans, [e].

76.

Ans, [c].

77.

Ans, [a].

78.

Ans, [a].

79.

Ans, [b].

80.

Ans, [a].

81.

Ans, [b].

82.

Ans, [a].

83.

Ans, [b].

84.

Ans, [a].

85.

Ans, [b].

86.

Ans, [b].

87.

Ans, [a].

88.

Ans, [a].

89.

Ans, [b].

90.

Ans, [c].

91.

Ans, [e].

92.

Ans, [c].

93.

Ans, [c].

94.

Ans, [d].

95.

Ans, [d].

Workbook

equal to the discounted present value of its cash

flows.

Ans, [e].

101. The option is out of the money; therefore the intrinsic

value is zero. The premium of an option does not

affect the intrinsic value of the option.

Ans, [a].

102. Arbitrage Pricing Theory uses multiple regression

(many factors) to determine a model or formula that

has numerous factors. This model is then used to

determine the value of a security. The CAPM is

based on the single factor of Beta, which a portfolio.

Ans, [a].

103. A call option has unlimited price potential which

means that writing a call without the stock as a hedge

will provide the greatest loss potential.

Ans, [b].

104. The market risk premium is the additional return for

accepting the risk of the market. If the market

premium increases with all else remaining the same,

then the price of the stock would have to decrease.

An increase in the market premium would also

increase the discount rate used to value the stock.

This higher discount rate will cause the present value

of the cash flows to be smaller.

Ans, [d].

105. PV = Rs.1.36

FV = (Rs.2.00)

N= 5

i = 8.02

d1 1.082 (2.00) 2.16

Value of common stock = Rs.54.00

RRR - g 0.12 - 0.08 0.04

RRR = Required Rate of Return

g = growth rate

Ans, [e].

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71

beta.

Ans, [d].

107. PV = (Rs.1,147.20), PMT = 80, N =10, PV = Rs. 1050,

FV = Rs.1,000, i = 65.45

The price of a bond is inversely related to changes in

interest rates. Therefore, #1, #2, and #3 are all correct.

Ans, [a].

108. Non-diversifiable risks or systematic risks are those

that affect the entire market, including market risk,

interest rate risk, and purchasing power risk.

Ans, [a].

109. ADRs are used to trade foreign securities in the U.S.

ADRs are foreign shares denominated in U.S. dollars

and do not eliminate currency risk.

Ans, [d].

110. Statements 1, 2 and 3 are true. Statement 4 is false

because tax swaps generally take advantage of

capital losses by selling bonds, which have been

devalued by increasing interest rates.

Ans, [a].

111. Statement 1 is true. It is not necessary to have

negatively correlated assets; it is only necessary to

have assets that have a correlation less than positive

one (+1); thus, Statement 2 is false. Statement 3 is

false, because diversifying across asset types is

more, not less, effective than within an asset type.

Statement 4 is false, because all the input variables

in Statement 1 help to create the efficient frontier.

Ans, [c].

112. Convertible bonds generate current income from

coupon payments and allow for growth through the

stock conversion feature. Options [a] & [b] provide

income only and Option [c] is designed for growth.

Ans, [d].

return for the given risk level. On the line would

indicate an expected return for the given risk level.

Below the line would indicate lower than expected

return for the given risk level.

Ans, [b].

118. A debenture is an unsecured corporate debt.

Ans, [e].

119. The goal of immunization is to match the investment

time horizon with the duration of the portfolio. Since

the duration of a coupon bond is less than its

maturity, only the 9-year bond might immunize the

portfolio. The other two choices will not immunize

the portfolio. The best choice would be a 7-year

zero-coupon bond; however, this choic e is not

available.

Ans, [b].

120. Systematic risk cannot be eliminated, thus Statement

2 is false. Beta only measures systematic risk;

Statement 5 is false. All other statements are true.

Ans, [b].

121. Rupee cost averaging is when an equal rupee

amount is inves ted periodic ally. This does not

prevent capital losses but can lower the average cost

per share due to periods of decline in the stock price.

Ans, [b].

122. CFo = (Rs.9,200) CF1 = Rs.600 CF2 = Rs.2,300

CF3 = Rs.2,200 CF4 = Rs.6,800 CF5 = Rs.9,500

IRR = 24.18%

Ans, [c].

123. Statement 4 is false, because if the cost of capital is

les s than the IRR, then the project should be

accepted (NPV > 0).

Ans, [d].

113. The exercise price for a put is the price at which you

can sell the stock. Thus, a price of Rs.55 will be

assured if she buys a Rs.55 put.

Ans, [c].

yield FMV @ June 30 last year Rs.400,000 Change

in value Rs.85,000 FMV @ June 30 last year =

Rs.400,000 = 21.25% appreciation (Before tax)

Ans, [d].

using dividend growth model), k - g 0.09 - 0.04 Since

the value of Rs.47.84 is greater than the current

market price, the stock is underpriced in the market.

Tom should purchase the stock.

Ans, [a].

125. The bond with the longest duration has the greatest

interest rate risk. The greater the duration, the more

effect a change in interest rates has on the bond's

value. A zero coupon bond's duration equals its time

to maturity.

Ans, [a].

for wealth accumulation is to determine the risk

tolerance of the investor.

Ans, [d].

Coupon bonds (the remaining options ) have

durations less than their maturities. Higher duration

bonds are subject to more price volatility than lower

duration bonds.

Ans, [b].

growth would have a significant positive impact on

the value of a stock. Under the Efficient Market

Hypothesis, any expected changes would already

be reflected in the price of the common stock.

Unexpected increases in inflation would increase the

discount rate and reduce the value of the fund.

Ans, [c].

72

risk. Since the quality of the bond is high, the level

of default risk is low.

Ans, [a].

Investment Planning

Workbook

from the option premium with little risk since she does

not expect the stock to continue to increase. If the

stock does exceed Rs.50, she would be paid what

she wants for the stock.

Ans, [b].

between the discounted inflows and the initial

outflow. For example, if the discounted cash inflows

were Rs.10 and the initial outflow was Rs.8, then

the NPV would be Rs.2.

definition of the semi strong form of the efficient

market hypothesis.

Ans, [c].

130. N = 35 (17.5 x 2)i = 4 (8/2)PMTOA = Rs.37.50

(Rs.75/2) FV = Rs.1,000, PV = (Rs.953.34)

Ans, [c].

131. Generally, investors evaluate performance of

inves tments bas ed on risk adjus ted returns .

Therefore, options [a] and [b] must be wrong since

they only address one aspect of the risk-return

relations hip. Treynor and Sharpe ratios are

performance measures in which the higher the ratio,

the better the risk adjusted return. No calculation is

needed for this question. Option [d] is the only

reasonable answer. It is the only one that indicates

that a fund s hould be c hosen, bec aus e the

performance measure is high (not low).

Ans, [d].

132. To immunize a bond portfolio, an investor should

match the duration of the bond portfolio to the

investment time horizon.

Ans, [b].

133. Mortgage-backed securities are subject to the same

risk as bonds plus the risk of prepayment.

Ans, [d].

134. Question 1 should always be asked. Question 2 is a

reasonable question, since it provides the planner with

a concept of the client's investment experience

leading to suitability. This type of analysis is a part of

data gathering. Question 3 goes to suitability and

should be asked, or the age should be determined

relative to risk and time horizon. The question relates

to the first two stages of data collection and goals.

Reinvestment of dividends does not go to suitability

and will be addressed after the investment decision

is made. Below is the CFP Board of Examiners'

clarification of the question: (1), (2), and (3) all relate

to the second step of the financial planning process,

namely, "Gathering client data and determining goals

and expectations". The first step is "Establishing the

client-planner relationship".

Ans, [c].

135. Duration is a present value, time weighted measure

of payback. All of the factors listed are important

components in determining duration.

Ans, [e].

Ans, [d].

137. This question is regarding the constant dividend

growth model for determining the value of a stock.

The following formula is used for the constant

dividend growth model:

D1P0 = k - g where:

P0 = Price for the security. D1 = The dividend paid

at period 1.

k = The investor's required rate of return.

G = The growth rate of the dividends.

Therefore, the value of the stoc k is Rs.40.04,

calculated as follows: (Rs.3.85)(1.04)

P0 = = Rs.40.04 .14 - .04

Ans, [c].

138. A stock index fund is a mutual fund that mirrors a

stock index. Typically, the fund pays little or no

dividends, and is therefore tax efficient. Option [a] is

incorrec t, nonleveraged equipment leasing

investments have more of an income objective than

a growth objective and are not tax efficient because

the income is taxed each year. Option [b] is incorrect

because option [a] balanced mutual fund usually

invests a large percentage of the fund assets in fixedincome securities. Option [c] is incorrect because

preferred stocks often pay a large dividend and

usually have an income objective.

Ans, [d].

139. Ans, [b].

140. Ans, [a].

141. Ans, [c].

142. Ans, [b].

143. Ans, [b].

144. Ans, [b].

145. Ans, [a].

146. Ans, [a].

Workbook

Investment Planning

73

longer has any earning power. Further, he needs

certainty of income. But a small amount of equity is

still recommended as a hedge against inflation. If

not, if he lives until say 80, he will experience a drop

in his standard of living.

Ans, [a].

149. Ans, [a].

150. Ans, [a].

151. Ans, [c].

Balanced Fund, Growth Fund and Small Cap Fund.

A small cap fund is more risky than a growth fund.

Earnings of smaller companies are more exposed

to the vagaries of the economic cycle.

Ans, [c].

semiannual will result in the coupons becoming more

significant compared to the final payment on a

weighted average basis and decreases the duration

of a bond . All other factors will increase the duration

of a bond.

Ans, [b].

measure.

Ans, [c].

153. Ans, [d].

154. Ans, [c].

167. Ans, [a].

168. Ans, [d].

of correlation]

Ans, [b].

to a drop in competitiveness of a countries exports statement is false. Statement IV is false. Lower

domestic inflation will lead a strengthening exchange

rate. The other statements are true.

Ans, [a].

179. Ans, [c].

180. Ans, [d].

181. Ans, [b].

182. Ans, [c].

183. Ans, [b].

74

204. Given that the coupon rate is less than the yield to

maturity of similar instruments, the bond will sell at

a discount.

Ans, [b].

Investment Planning

Workbook

Rs.0.27, PER = 5.00/0.27 = 18.5

Ans, [d].

rate)] / (Return- growth rate)

Ans, [c].

prices contain all information, private and public. The

fact that Mr A was able to beat the BSE is a violation

of the strong form of market efficiency

Ans, [d].

Annual upkeep & maintenance =Rs 10 lakhs (B)

Net income annually=Rs 17,00,000 (A-B)

Capitalization rate=10%

Value of the complex=Net income / Capitalization rate

Ans, [b].

207. The only answer that does not satisfy II. An increase

in the dividend growth rate leads to an increase in

the stock price

Ans, [c].

208. (7x0.2) + (12x0.3) + (20x0.15) + (5x0.35) = 9.75

Ans, [c].

209. By definition, as the stocks are positively correlated,

they move in the same direction but Stock B will move

three quarter as much as Stock A.

Ans, [c].

210. Beta only captures systematic non-diversifiable risk

of a security. Therefore, I is False, II is True, III is

True, IV is False. Inves tors form portfolios to

eliminate non-systematic risk.

Ans, [b].

211. A money market fund invests only in short term

money market instruments such as short term debt

securities, Treasury bills, banker's certificates of

deposits and bank acceptances. As the instruments

are highly liquid, usually no notice for withdrawal is

required. In fact, some money market funds provide

quasi checking facilities. Money market funds can

pay current income as the instruments mature in the

short term. It should also be mentioned that money

market funds have low interest rate risk because of

the short tenor of the instruments.

Ans, [b].

212. PV is -Rs.20,000, FV is 400,000 with yearly

payments of - Rs.10,000. Number years is 21,

implying retirement age of 51.

Ans, [b].

213. Ans, [a].

222. Average market capitalization rate: (4.20% + 5.45%

+ 6.00%)/3 = 5.22% Market value: Rs. 15,600/0.0522

= Rs.299,041

Ans, [c].

223. Ans, [d].

224. Using the Growth Dividend Model, the calculations

are as follows:

R = Risk free rate + risk premium

Div1 = Div x (1 +g)

P = Div1/(R - g)

Where P = price

Div1 = dividend in year 1

R = required rate of return or discount rate

g = constant dividend growth rate

R = 0.06 + 0.07 = 0.13

Div1 = 8 x (1 + 0.05) = 8.4

P = 8.4/(0.13 - 0.05) = 105

Ans, [b].

225. As both funds appreciated by the same amount, the

investor made identical returns from both funds:

Rs.4000 x 18% = Rs.720. There is a misconception

that a lower priced fund has a higher return. I is true.

Rs.4000/1.02 = 3921.57 units II is true. Rs.4000/0.58

= 6896.55 units

Ans, [a].

226. Ans, [c].

227. Total return is calculated as follows: (P2 - P1 + Div)/

P1 x 100, (112 - 113 + 6)/113 = 4.4%

Ans, [b].

228. Ans, [c].

13.636

Ans, [d].

230. Ans, [c].

Interest = 8%

EMI for 15 Years = Rs 11682.95

EMI for 30 Years = Rs. 8882.74

Rs. 11682.95 < 2 x 8882.74

Ans, [b].

235. Ans, [a].

236. Ans, [a].

237. Ans, [c].

238. Ans, [c].

239. Ans, [c].

Workbook

Investment Planning

75

245. Ans, [a].

is no of years to double.

Ans, [e].

Ans, [a].

N = 2, PV = (Rs.900), PMTOA = Rs.60, FV =

Rs.1,000, i = 11.90998

Ans, [d].

76

311. Ans, [a].

Investment Planning

Workbook

Ans, [c].

329. Ans, [d].

330. Ans, [c].

Ans, [b].

Ans, [c].

Ans, [a].

337. Ans, [a].

Bond' s par value - Current bond price

Annual interest +

Number of years to maturity

339. Ans, [b].

340. Ans, [a].

Ans, [b].

342. Ans, [a].

343. Ans, [a].

344. Ans, [a].

345. Ans, [b].

346. Ans, [b].

347. Ans, [b].

348. Ans, [b].

349. Ans, [c].

350. Ans, [c].

19.2%, 40 x 1.192 = 48

Ans, [a].

376. Expected return = (0.20) (0.05) + (0.40) (0.10) + (.10)

(0.08) + (0.30) (0.11) = 0.091 = 9.1%

Ans, [a].

377.

(a)

(b)

Arithmetic Mean

5

= 0.034 or 3.4%

(c)

= 0.032 or 3.2%

Geometric Mean

1

-1]

5

Workbook

Investment Planning

77

(d)

Variance

value of its promised cash flows. In this case:

Rs. 75

(1.10)1

=

=

Rs. 937.82

market is more than what is required.

384. i) A bond's YTM is the interest rate that equates the

bond's current price to the discounted value of its

promised cash flows. In this case:

= 54.3

(d)

Standard Deviation

Rs. 1032.40 =

= 7.37

378. This multiple growth DDM expresses a stock's

intrinsic value as :

N

Dt

t

T = 1 (1 + k )

[(k - g) (1 + k)N ]

(1 + y )

Rs.100

Rs.100

+

(1 + y)2

(1 + y )2

is 9%.

Rs. 1032.40 =

Rs.100

(1 + y )1

Rs.1200

(1 + y )2

YTC = 12.7%

[(0.10 - .04) x (1.10)4]

{7.28}

[(.06) x (1.4641)]

year and final amount at maturity ie 10000. with the

required discount rates.

with 10% YTM=Rs 8771

With a 5% YTM= Rs 12316

379. The intrinsic value of a perpetual constant income

stream, discounted at a rate K, is given by:

V = D/K

In the case of H pipes, the intrinsic value of the

preferred stock is:

V = Rs. 12/.15 = Rs. 80

380. If ABC Ltd. will earn 20% on its equity and pay out

50% of its earnings indefinitely, then its growth rate

is

G = r x (1-p)

= .20 x (1-.50)

= .100 = 10.0%

In case of constant growth:

V = [(1-P) x Eo x (1+g)] /(k-g)

Thus for ABC Ltd.

V = [(1-50) x Rs. 4 x (1+.10)] / (.15-.10)

= Rs. 2.20 / 0.5 = Rs. 44

381. F0 = So (1+rf)t 1/12

= Rs. 16 (1.09)

= Rs. 16.115

distribution is given by

rt = [ (NAVt NAVt 1) + Dt] / NAVt-1

In the case of the Saturn fund:

rt = [(Rs.16.90 Rs.18.50) + Rs.1.25] / Rs.18.50 =

0.019 = 1.9%

387. The expected returns on the three securities in

Manoj's portfolio are:

rA = (.30 x -10%) + (.20 x 0%) + (.30 x 10%) + (.20 x

20%) = 4.0%

rB = (.30 - 10%) + (.20 x 10%) + (.30 x 5%) + (.20 x

-10%) = 4.5%

rC = (.30 -0%) + (.20 x 10%) + (.30 x 15%) + (.20 x

5%) = 7.5%

The expected return on Manoj portfolio is therefore:

rp = (.20 -4.0%) + (.50 x 4.5%) + (.30 x 7.5%) =

5.3%

3603.5

78

ii) If the bond can be called in two years for Rs. 1100,

its yield-to-call is found by solving for the YTM assuming

the receipt of only two coupon payments and a call

price of Rs. 1100. That is:

{DN x (1 + g)}

(1.10)3]

Rs.100

securities are:

s A = {[.30 x (-10 - 4.0)2] + [.20 x (4-4.0)2] + [.30 x

(10-4.0)2] + [(.20 x (20-4.0)2]}

Investment Planning

Workbook

Jensen Index: Rp - Rf + b P (R m - Rf )

Funda A: 12 [6 + 1.1(5)] = 0.5

Funda B: 10 [6 + 0.9(5)] = 0.5

Funda C: 13 [6 + 1.2(5)] = 1.0

Market Index: 0 (By definition)

(5-4.5)2] + [(.20 x (-10 -4.5)2]} [9.1 + 6.1 + 0.1 +

42.1] = 7.6%

s C = {[.30 x (0 - 7.5)2 + .20 x (10-7.5)2 + (.30 + (157.5)2 + (.20 x (5 - 7.5)2]} [16.9 + 1.3 + 16.9 + 1.3]

= 6.0%

The fact that the three securities are uncorrelated

with each other simplifies the calculation of the

portfolio's standard deviation. Specially,

of the measurement period, the rate of return is: R0R

= (End value - Beg value - Cont.) / Beg value

In Vipul's case: RoR = (Rs. 42,000 - Rs. 39,000 Rs. 4000) / Rs. 39000 = - .026 = -2.6%

392.

(6.0)2} [4.9 + 14.4 + 3.2]

= 4.7%

388. The weights that derive the standard deviation of

portfolio to zero, when the returns are perfectly

negatively correlated, are:

Wp =

30

sQ

=

= 0.545

sP + sQ

25 + 30

0.545 16% + 0.455 18% = 16.91%

389. (a) Covariance (A, B) = AB * s A * s B

= 0.60 x 15 x 8 = 72

(b) Expected return = 0.6 x 16 + 0.4 x 12 = 14.4%

Risk (standard deviation) =

[X2A s2A + X2B s2B + 2 *wa*wbCov (A, B) ]

= [(0.6)2 x 225 + (0.4)2 X 64 + 2 X.6*.4 72]

measure, Sharpe measure and Jensen measure.

Answer

Treynor

Sharpe Ratio

P = 25%

P = 5.55

Q = 29.16%

Q = 6.36

R = 33.3%

R = 7.5

Market = 30%

Market = 6

Jensen

P = -0.4

Q = 0.4

R = 1.8

Market = 0

393. Ans, [b].

= 11.21%

390. Treynor measure:

Rp - Rf

bp

12 - 6

Fund A:

= 5.45

1.1

395. Ans, [d].

396. Ans, [c].

10 - 6

= 4.44

0.9

13 - 6

Fund C:

= 5.83

1.2

Fund B:

11 - 6

1 .0

market Index:

Sharpe Measure:

Rp - Rf

sP

12 - 6

Fund A:

= 0.333

18

Fund B:

10 - 6

= 0.267

15

13 - 6

Fund C:

= 0.350

20

Market Index:

Workbook

11 - 6

= 0.294

17

401. Ans, [b].

402. Ans, [e].

403. Ans, [e].

404. Ans, [c].

405. Ans, [a].

406. Ans, [a].

407. Ans, [b].

408. Ans, [c].

409. Ans, [e].

Investment Planning

79

ii Ans, [b]

ii Ans, [a]

iv Ans, [c].

ii Ans, [a].

ii Ans, [d]

ii Ans, [b]

ii Ans, [d]

ii Ans, [c]

ii Ans, [b]

ii Ans, [e]

ii Ans, [c]

ii Ans, [d]

ii Ans, [a]

ii Ans, [b]

ii Ans, [a]

ii Ans, [d]

ii Ans, [b]

ii Ans, [d].

ii Ans, [b]

ii Ans, [c].

466.

ii Ans, [d].

ii Ans, [a].

ii Ans, [a].

ii Ans, [c].

ii Ans, [b].

ii Ans, [b].

ii Ans, [b].

ii Ans, [b].

ii Ans, [b]

ii Ans, [d].

ii Ans, [b].

ii Ans, [c].

ii Ans, [c]

ii Ans, [b]

ii Ans, [b].

ii Ans, [b]

ii Ans, [b].

ii Ans, [d]

470.

ii Ans, [c]

ii Ans, [c]

ii Ans, [c]

ii Ans, [b]

415. Ans, [d].

416. Ans, [b].

417. Ans, [d].

418. Ans, [d].

419. Ans, [a].

iv Ans, [d].

421. i Ans, [c]

ii Ans, [b]

ii Ans, [b]

iv Ans, [b]

iv Ans, [b]

(i)

iii Ans, [b].

is received from writing call, so the net cash flow

is cash outflow of Rs. 35 for call writer.

Ans, [b].

(ii)

the call.

Ans, [c].

(iii) 1 / 38 = 2.63%

Ans, [d].

(iv) 2 / 38 = 5.26%

Ans, [a].

iii Ans, [b].

v Ans, [a]

ii Ans, [b].

ii Ans, [c].

ii Ans, [d].

80

Investment Planning

Workbook

Appreciation of the stock - Rs. 25,000 - Rs. 20,000 =

Rs. 5,000

Dividend receipt = Rs. 1,000

Total return after one year = Rs. 6,000 i.e. Rs. 6,000

for Rs. 20,000 which works out to 30%.

ii. The return on Ray's bond portfolio during the year

Depreciation of the bond = Rs. 30,000 - Rs. 23,000 =

Rs. 7,000 Coupon receipt = Rs. 3,000 Total return after

one year = Rs. 4,000 i.e. Rs. - 4,000 for Rs. 30,000

which works out to - 13.33%.

iii. The return on Ray's total portfolio during the year.

Depreciation of the portfolio - Rs. 50,000 - Rs. 48,000

= Rs. 2,000 Dividend/Coupon receipts = Rs. 4,000

Total return after one year = Rs. 2,000 i.e. Rs. 2,000

for Rs. 50,000 which works out to 4%.

471. i. The weight of Security B: The mean between the

cost price and expected year end price = (78 + 75) /

2 = 76.5 The difference between the mean and the

cost price (initial price) = Rs. 1.5. Ratio between the

difference and the cost price = weight of security =

2%

ii. The expected return on Security C. The ratio

between appreciation and the cost price determines

the rate of return. i.e. Rs. 15 per share on the cost

price of Rs. 125 per share - works out to 12%

iii. The return on Security A Similar to (ii) above, the

ratio between cost price and expected price - i.e.

40/100 = 40%

iv. The figure of return on the portfolio that is approx.

equals in the following: Similar to (ii) & (iii) above,

the return of

historical evidence for the same stock, sector or

market, if the ratio is above its historical average,

pric e may be c ons idered too high unless a

substantial increase in earnings is likely in the

following years. So, investment in Acharya is a better

choice for investment with the lower ratio.

473. i. ESTIMATED Dividend = Rs. 1.5 Growth Rate =

11% (estimated) Discount Rate (assumed) = 15%

Present Value of the share = P0 = Expected Div./

(discount rate - growth rate) Expected Dividend =

Current dividend x growth rate - i.e. 1.5 x 111%

(100+11) = 1.665 Present Value = 1.665/15 - 11 =

1.665/4% = 1.665/0.04 = 41.625.

ii. Real Term (reality) Dividend = Rs. 1.5 Growth

Rate = 7% (reality) Discount Rate (assumed) = 15%

Expected Dividend = Current dividend x growth rate

- i.e. 1.5 x 107% (100+7) = 1.605 Present Value =

1.605 / 15-7 = 1.605/8% = 1.605/0.08 = 20.063

In reality, it may be seen that the present value of

the share is only Rs. 20 whereas the current share

price is Rs. 25. Only on estimated growth rate of

11% (as against a real growth rate of 7%) the share

price may touch Rs. 42. On the estimation of real

terms, it is better to sell.

Ans, [b].

(Note : If the es timation is bas ed on s ound

extraneous factors adding to the growth, that the

condition c an be deemed to be acc eptable for

holding or buying)

474. Ans, [b]

475. Jensen's Index: Formula: - Fund's mean - [Risk free

rate of Market Index + (difference a the market index

mean - free rate) x Fund's beta] FUND KASHYAP a

14% - [9% + (12% - 9%) x 1] = 14% - 12% = 2%

FUND VIMALESH a 16% - [9% + (12% - 9%) x 2] =

16% - 15% = 1%

Treynor index: Formula: - (Fund's mean - free of

Market index) / fund's beta FUND KASHYA a (14% 9%) / 1 = 5 FUND VIMALESH a (16% - 9%)/2 = 3.5

(Dividend per share x 100) / Market price = (0.12 x

100) / 40 = 0.3

ii. The P/E Ratio of Bhushan P.E. Ratio (Price

Earning Ratio) = Market price/Earnings per share

Earning per share = (Profit after tax - Div. on Pref.

Shares)/no. of equity shares Earnings per share is

given. So, P/E Ratio = 60 / 0.175 = 342.86 i.e. 343

iii. The better investment proposition of the two: P/E

Ratio of Bhushan = 343 (shown above) P/E Ratio of

Acharya = 40/0.22 = 181.88 i.e. 182 Please note "Lower the denominator, higher the ratio."

Workbook

of Market index)/Std. Deviation of the Fund

FUND KASHYAP a (14% - 9%)/12 = 41.67%

FUND VIMALESH a (16% - 9%) / 18 = 38.89%

MARKET a (12% - 9%)/9 = 33.35%

476. Use pv function on excel or This should be dealt

with the discounted cash flow method. Present value

= PMT/(1+i)1 + PMT/ (1+i)2 + PMT / (1+i)3 + PMT

(1+i)4 + PMT/(1+i)5 + PMT / (1+i)6

55,000

(1 + 0.15)1

55,000

(1 + 0.15)4

Investment Planning

55,000

(1 + 0.15)2

55,000

(1 + 0.15)5

55,000

(1 + 0.15)3

55,000

(1 + 0.15)6

8,50,000

(1 + 0.15)6

81

+ 23,778 + 3,67,478.5 = 5,75,625

Ans, [c].

477. Ans, [a].

478. The risk on the portfolio takes into consideration the

standard deviations of individual securities and the

interactive risk between the pair of securities.

FORMULA:XA = 60% XB = 40% s A =14.5%

s B = 18.5% r AB = 0.91 (correlation coefficient)

= square root of [0.62 x 14.52 + 0.42 x 18.52 + 2

x 0.6 x 0.4 x 14.5 x 18.5 x 0.91]

= sq. root of 75.69 + 54.76 + 17.17

= sq root of 247.62 = 15.74

479. i. Calculate expected rate of return on the portfolio.

Expected return on security A=(0.1 x 40)+(0.2 x

20)+(0.4 x 0) + (0.2 x -5) + (0.1 x -10) = 6%

Expected return on Security B = (0.1 x 40)+(0.2 x

30) + (0.4 x 15)+(0.2 x 0) + (0.1 x -20) = 14%

Then, calculate the standard deviation for both

securities.

Security A = v (0.1 x (40-6)2 + (0.2 x (20-6)2 + (0.4 x

(0.6)2) + (0.4 x (0-6)2) + (0.2 x (-5-6)2) + (0.1 x (-106)2)) = v ((0.1 x 1156) + (0.2 x 196) + (0.4 x 36) +

(0.2 x 121) + (0.1 x 256)) = v 219 = 14.8%

Security B = v ((0.1 x (40-14)2) + (0.2 x (30-14)2) +

(0.4 x (15-14)2) + (0.2 x (0-14)2) + (0.1 x (-20-14)2))

= v (0.1 x 676) + (0.2 x 256) + (0.4 x 1) + (0.2 x 196)

+ (0.1 x1156) = v 274 = 16.55%

ii. Further, calculate the covariance between the

two securities. Assumption: Equal amount invested

in both securities since so proportion is assigned.

Covariance : = (0.1 x (40-6)(40-14)+(0.2 x (20-6)(3014) + (0.4 x (0-6)(15-14) + (0.2 x (-5-6) (0-14) + (0.1

x (-10-6)(-20-14) = 216

iii. Further calculate the standard deviation for the

portfolio risk: Std. Deviation:

= [(0.5 x 14.82 + 0.5 x 16.552) + (2 x 0.5 x 0.5 x

216)] = [109.52 + 136.95 + 108] = [354.47] =

18.83

480. Ans, [a].

481. Ans, [b].

482. Ans, [a].

489. Use the PRICE Function in excel. Eg. For Sett. Date

use 4/1/2004 (mm -dd-yyyy). Maturity Date: 3/31/2004;

Rate = 20; Yield = 8%; Redemption Value = Rs. 100;

Frequency = 1; Hence Price is Rs. 110.41.

Ans, [b].

490. Duration of a level annuity is: (1 + Yield/Yield) CE

No. of payments 91 + yield) ^ no of payments - 1

Hence duration = 2.88 years

Ans, [a].

491. Use the formula - P0 = D1/(R-G) ; Where P0 = 40;

D1 = 4.00; R = 12%; Hence G = 2.00%

Ans, [a].

492. Beta of Infocomm is (25-3)/(15-5) = 2.2; Beta of

FMCG = (12-7)/(15-5) = 0.5

Ans, [d].

493. Treynor Ratio = (Rp - Rf) / Beta; Hence 1.33; Sharpe

Ratio = (Rp CE Rf)/Standard Deviation; Hence 0.04;

Jensen = Rp - [Rf + B (RM CE RF)]; It measures the

risk adjusted portfolio return. It is also known as

JensenTMs Alpha; Hence - 4.25

Ans, [b].

494. 15.3%

495. 14.4%

496. i) 13.6% (ii) 1.5 Beta = (20%-8%)/ 8%

497. 16%

498.

for all the above is 2,1.6,1,1,1.8,1.33. Stock A is of

high returns for a unit of risk if the expected return is

8%, If the expected return is higher then stock E is a

good choice as it gives 9% with slight higher risk. If

the expected returns is higher and is at 12%, The

only choice is to go for higher risk and select stock C.

ii. For a portfolio of 75% A and 25%B The expected

returns is (.75 x 8%+.25 x 12%)=9% while the

Standard deviation for portfolio is 6%. It is not a good

choice as stock E gives same returns at a standard

deviation of 5%. It may be preferable to go for choice

of stock E than the above portfolio.

499. i)

iii) 16.2%

486. The length of time the investor expects to hold the

investment

Ans, [a].

487. Ans, [a].

488. PPF investments can only be made on behalf of

immediate family members.

Ans, [b].

82

investing in XY is better than investing in VV.

ii) 22.6%, 37.06%

iii) 22.76%, 17.5%

iv) 0.974

Investment Planning

Workbook

Notes

Workbook

Investment Planning

83

Notes

84

Investment Planning

Workbook

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