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4. As there is no explicit cost of retained earnings, these funds are free of cost? Explain the statement.
There is an opportunity cost to retained earnings as these funds could be invested on a decent rate of return above the
risk free rate (10 Year G-Sec Bond).So the company must be prudent to use these funds to generate a return more than
the expected return.
8. What is the difference between Gross Profit, Operating profit and Net Profit?
GP is the amount that remains after the direct costs of producing a good or service subtracted from revenues. Further
subtracting operating expenses, such as selling, general & administrative expenses from GP results in another subtotal
known as Operating Profit. Subtracting Interest expenses & income tax from operating profit results in firms net income.
10. Companys current ratio is very high but the quick ratio is very low. Interpret.
The formula for Current Ratio is Current Assets/Current Liabilities whereas formula for quick ratio is Cash marketable
Securities+ Receivables/Current liabilities thus the quick ratio excludes Inventories which may not be able to be
liquidated for requirement of urgent money. If Current ratio is higher than quick ratio it indicates company is sitting on
too much inventories.
11. Company is following an erratic dividend policy. Comment
This dividend policy seems to be indifferent to the welfare of equity shareholders. Dividends are paid erratically
whenever the management believes it will not strain its resources. Companies that follow erratic dividend policy are
ignored by any investor that craves dividend stability. These companies by the very nature of their business models are
simply in no position to guarantee that dividends will remain constant & growing.
12. What are the factors that a finance manager must take into consideration while taking decisions on the
firms capital structure?
Tax Consideration, Reserve Borrowing Capacity, Cash Flows for servicing debt capital, Signalling to market,
Management control of business, Financing Flexibility, Asset Structure, Credit Rating of debt securities, Market outlook
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13. Define Modified Internal rate of return?
The calculation of IRR implicitly assumes that the positive cash flows earned during the life of a project are re-invested
at the rate of the IRR until the end of the investment period. This could cause the IRR to be overly optimistic. MIRR was
developed to counter this assumption. MIRR calculates the return on investment based on the more prudent assumption
that the cash inflows from a project shall be re-invested at the rate of the cost of capital. As a result, MIRR usually tends
to be lower than IRR.
14. Explain the need for a debt service coverage ratio. How is it calculated?
It allows us to determine whether firm is earning enough operating revenues to satisfy all its debt obligations (Interest &
Principal).Its formula is EBIT/(Interest Exp + (Principal payments/(I-t)).
22. Define the terms par value, maturity date, coupon rate with respect to a bond?
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Par Value- The face value (also known as the par value or principal) is the amount of money a holder will get back once
a bond matures
Coupon Rate- The coupon is the amount the bondholder will receive as interest payments. It's called a "coupon"
Maturity Date- The maturity date is the date in the future on which the investor's principal will be repaid.
24. Define the terms capital budgeting, regular payback period and discounted payback period?
Capital Budgeting is a process of identifying & evaluating capital projects that is where the cash flows of the firm will be
received over a period of 1 year. It is a cost-benefit exercise where the benefits from improved decision making should
exceed the costs of capital budgeting efforts. It is mainly used in Replacement decisions to maintain the business,
Existing product or market expansion, New products and services, Regulatory safety and environmental
Regular Payback Period- Payback period (PP) is the number of years it takes for a company to recover its original
investment in a project, when net cash flow equals zero. In the calculation of the payback period, the cash flows of the
project must first be estimated. Generally the shorter the payback period the better.
Discounted Payback period- The discounted payback period is the number of years it takes to recover the original
investment in terms of the present value of the cash flows. The present value of each cash flow is calculated and then
added to arrive at the discounted payback period.
26.Define the term capital structure, business risk and financial risk?
Capital structure is the proportion of debt and preference and equity shares on a firms balance sheet.
Business Risk- Business risk is the possibility a company will have lower than anticipated profits or experience a loss
rather than taking a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input
costs, competition, the overall economic climate and government regulations.
Financial Risk- A Companys financial risk, however, takes into account a company's leverage. If a company has a high
amount of leverage, the financial risk to stockholders is high - meaning if a company cannot cover its debt and enters
bankruptcy, the risk to stockholders not getting satisfied monetarily is high.
27. Define the terms gross working capital and net working capital?
Gross Working Capital- Gross working capital is the sum of all of a company's current assets (assets that are
convertible to cash within a year or less). Gross working capital includes assets such as cash, checking and
savings account balances, accounts receivable, short-term investments, inventory and marketable securities
Net working capital is a liquidity calculation that measures a companys ability to pay off its current liabilities with
current assets. This measurement is important to management, vendors, and general creditors because it shows the
firms short-term liquidity as well as managements ability to use its assets efficiently.
Net Working Capital-Current Assets Current Liabilities
28. Define the terms inventory conversion period, receivables collection period, creditors payment period, cash
conversion cycle?
All these ratios like Inventory conversion, Creditors payment ratio come under Activity Ratios. It is desirable to have
these ratios close to the industry norm.
Inventory conversion period Formula is 365/Inventory Turnover where inventory turnover is COGS/Average
Inventory. Interpretation is processing period that is too high might mean that too much capital is tied up in inventory &
thus the inventory is obsolete whereas a low inventory processing period signifies firm has less stock in hand which
might hurt sales.
Receivable Collection Period formula is 365 / Receivable turnover where receivable turnover is Annual Sales/Average
Receivables. Interpretation is if that collection period is too high, it signifies customers are slow in paying their bills which
further means lot of capital is ties up in assets whereas a low collection period indicates firm credit policy is too rigorous,
which might be hampering sales.
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Creditors payment period formula is 365/ Payables turnover ratio where Payables turnover is Purchases/ Average
Trade Payables. It is the average time it takes the company to pay its bills.
Cash Conversion Cycle-The formula is (Inventory conversion+ Receivable Collection Period- Creditors payment
period).It indicates the times taken to convert the firms cash investment in inventory back into cash.
29. What are trade discounts?
A trade discount is the reduction granted by a supplier of goods/services on the list or catalogue prices of the goods
supplied. It is provided due to business consideration such as trade practices, large quantity orders, etc. It is given on
both cash & credit transactions. Trade discount is not separately shown in the books of accounts, and all amounts
recorded in a purchases or sales book are done in the net amount only.
31. What do you understand by credit policy, credit period, collection policy, cash discounts?
A firms credit policy is the set of principles on the basis of which it determines who it will lend money to or gives credit. It
is a set of guidelines that highlight the terms & conditions for supplying the goods on credit, Customer Credit worthiness,
Collecting procedure, Precautionary steps in case of default.
Credit Period- The credit period is the number of days that a customer is allowed to wait before paying an invoice. The
concept is important because it indicates the amount of working capital that a business is willing to invest in its
Accounts receivable in order to generate sales.
Cash Discounts-Incentive offered by a seller to a buyer for settling the invoice immediately on delivery or in a period
substantially shorter than the conventional period in that industry.
Collection Policy-Collection policy is to ensure the earliest possible payment of receivables without any customer
losses. Early collections reduce the investment required to carry receivables & the costs associated with it.
33. What do you understand by moderate, aggressive and conservative financing of working capital?
The aggressive approach is a high-risk strategy of working capital financing wherein short-term finances are utilized
not only to finance the temporary working capital but also a reasonable part of the permanent working capital. In this
approach of financing, the levels of inventory, accounts receivables and bank balances are just sufficient with no
cushion for uncertainty. There is a reasonable dependence on the trade credit.
Conservative approach is a risk-free strategy of working capital financing. A company adopting this strategy maintains
a higher level of current assets and therefore higher working capital also. The major part of the working capital is
financed by the long-term sources of funds such as equity, debentures, term loans etc. So, the risk associated with
short-term financing is abolished to a great extent.
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shares) availed of from non-resident lenders by Indian corporations & PSUs with a minimum average maturity of 3
years.
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46. Define the terms operating lease and financial lease?
Operating Lease-It is an essentially a rental arrangement. No asset or liability is reported by lessee & the periodic lease
payments are simply recognised as rental expense in the income statement.
Finance Lease-A purchase of an asset that is financed by debt. Accordingly, at the inception of lease, the lessee will
add equal amounts to both assets & liabilities on the balance sheet. Over the term of lease, the lessee will recognise
depreciation expense on the asset & interest expense on the liability.
47. What are the two principal reasons for holding cash?
The Two principal reasons of holding cash are- Reserves for any contingencies, Distributing as dividends to
shareholders & Using as working capital.
48. Name the various financial instruments dealt with in the international market?
T-Bills, Commercial Paper, Certificates Of Deposit, Currency Future, Options, Swaps, ECBs, Overseas Funds
50. Discuss the features of equity capital as a method of long term finance?
Right to Income-Equity holders have a residual claim on the income of the company after paying the preference
dividends to preference shareholders.
Claim on Assets-Equity shareholders have a residual claim on the ownership of company assets after utilizing the
assets to meet the requirements of creditors & preference shareholders.
Voting Rights-Each equity share carries one vote & the shareholders have votes equal to the number of equity share
held by them. Hence equity holders have an indirect control over the working of the company.
Limited Liability- One distinct feature of equity of equity shares is limited liability. Although they are the real owners of
the company, their liability is limited to the value of shares they have purchased.
53. What is FCFF? What is the discounting rate used to discount FCFF?
Free cash flow for the firm (FCFF) is a measure of financial performance that expresses the net amount of cash that is
generated for a firm after expenses, taxes and changes in net working capital and investments are deducted. FCFF is
essentially a measurement of a company's profitability after all expenses and reinvestments. It's one of the
many benchmarks used to compare and analyse financial health.
FCFF = (EBIT + Other income) * (1- tax rate) + Depreciation Capex Increase in working capital
54. If a company issues gift vouchers and they are redeemed by the customer what are the accounting entries?
I record the Sale of the Gift cards as follows:
Debit - Cash
Credit - Deferred Revenue from Gift Cards
When a Gift card is redeemed I record the following entry:
Debit - Deferred Revenue from Gift Cards
Credit Sales
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Define the terms fully convertible, non-convertible and partly convertible debentures?
Non-Convertible Debentures (NCD): These instruments retain the debt character and cannot be converted in to equity
shares
Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at
notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.
Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. The ratio of
conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of
the company.
56. What is cash credit? Inter Corporate Deposits? Secured Premium Notes?
Cash Credit (CC) is granted against hypothecation of stock such as raw materials, work-in-process, finished goods and
stock-in-trade, including stores and spares.
What are inter-corporate deposits?
Inter-corporate deposits are deposits made by one company with another company, and usually carry a term of six
months. The three types of inter-corporate deposits are: three month deposits, six month deposits, and call deposits.
Three month deposits are the most popular type of inter-corporate deposits. These deposits are generally considered by
the borrowers to solve problems of short-term capital inadequacy. This type of short-term cash problem may develop
due to various issues, including tax payment, excessive raw material import, breakdown in production, payment of
dividends, delay in collection, and excessive expenditure of capital.
The annual rate of interest given for three month deposits is 12%. Six month deposits are usually made with first class
borrowers, and the term for such deposits is six months.
The annual interest rate assigned for this type of deposit is 15%. The concept of call deposit is different from the
previous two deposits. On giving a one day notice, this deposit can be withdrawn by the lender. The annual interest rate
on call deposits is around 10%.
What are secured premium notes?
Secured premium notes (SPNs) are financial instruments which are issued with detachable warrants and are
redeemable after certain period. SPN is a kind of non-convertible debenture (NCD) attached with warrant. It can be
issued by the companies with the lock-in-period of say four to seven years. This means an investor can redeem his SPN
after lock-in-period. SPN holders will get principal amount with interest on instalment basis after lock in period of said
period. However, during the lock in period no interest is paid.
Thus, SPNs are nothing but a share warrant which are only issued by the listed companies after getting the approval
from the central government. SPN is a hybrid security i.e. it combines both features of equity and debt products.
57. What are zero interest fully convertible bonds?
A fixed income instrument that is a combination of a zero-coupon bond and a convertible bond. Due to the zero-coupon
feature, the bond pays no interest and is issued at a discount to par value, while the convertible feature means that the
bond is convertible into common stock of the issuer at a certain conversion price.
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63. What is capital and revenue expenditure?
An amount spent to acquire or upgrade productive assets (such as buildings, machinery and equipment, vehicles) in
order to increase the capacity or efficiency of a company for more than one accounting period. Also called capital
spending.
Revenue expenditure is an amount that is expensed immediatelythereby being matched with revenues of the current
accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as
Repairs and Maintenance Expense.
69. Which valuation multiple is relevant for valuing banking companies? And why?
Price to Book value is relevant for valuing banking companies because most assets and liabilities of banks are
constantly valued at market values.
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72. What is consolidated EPS?
Consolidated EPS take into account the performance of subsidiaries and the share of minorities and associate
companies; this in many cases has a huge impact on the EPS of the consolidated entity.
73. What is a Differential Voting Right (DVR)? Why are these issued by companies?
A DVR share is like an ordinary equity share, but it provides fewer voting rights compared to the shareholder. So, for
instance, while a normal Gujarat NRE Coke shareholder can vote as many times as the number of company shares
he/she holds, someone who holds the companys DVR shares will need to hold 100 DVR shares to cast one vote. The
number of DVR shares required to be held will differ from one company to another.
Companies issue DVR shares for prevention of a hostile takeover and dilution of voting rights. It also helps strategic
investors who do not want control, but are looking at a reasonably big investment in a company.
74. What are ESOPs? What are the advantages of ESOPs? Which kind of companies issue ESOPs?
An employee stock ownership plan (ESOP) is an employee-owner program that provides a company's workforce with
an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, often at
no upfront cost to the employees thus acting as a motivator. ESOP shares, however, are part of employees'
remuneration for work performed. Shares are allocated to employees and may be held in an ESOP trust until the
employee retires or leaves the company. The shares are then either bought back by the company for redistribution or
voided. Companies belonging to IT Sector as human capital is valued & young companies like start-ups who want to
retain the talent & motivate them.
75. What are Sharpe and Treynor ratios? What do they signify?
The Sharpe ratio aims to reveal how well an equity investment portfolio performs as compared to a risk-free
investment. The common benchmark used to represent a risk-free investment is U.S. Treasury bills or bonds. The
primary purpose of Sharpe ratio is to signify excess returns per unit of total portfolio risk & higher the Sharpe ratios
indicate better risk-adjusted portfolio performance.
Formula of Sharpe ratio- R(p)-R(f)/ (p)
The Treynor ratio also seeks to evaluate the risk-adjusted return of an investment portfolio, but it measures the
portfolio's performance based on systematic risk. The treynor measure is calculated as R (p)-R (f)/ (p) interpreted as
excess returns per unit of systematic risk.
81. Who are primary dealers? And what is their role in financial markets?
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Primary dealers are registered entities with the RBI who have the license to purchase and sell government securities.
They are entities who buys government securities directly from the RBI (the RBI issues government securities on behalf
of the government), aiming to resell them to other buyers. In this way, the Primary Dealers create a market for
government securities.
89. What are Gross NPAs and Net NPAs? When does an account become an NPA?
An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.
Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully
within 90 days from the end of the quarter.
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The Reserve Bank of India defines Net NPA as Net NPA = Gross NPA (Balance in Interest Suspense account +
DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account +
Total provisions held)
91. Explain terms AUM, Expense Ratio, Portfolio Turnover Ratio, Alpha
AUM- AUM or Assets under Management is the total market value of investments managed by an asset management
company (AMCs).
Expense Ratio- The ratio is the annual expenses incurred by the funds expressed in percentage of their average net
asset. To make the choice between two similar funds, you should consider the expenses charged by them. Lower
expenses benefit you in the longer term. Usually, schemes with higher assets have lower expense ratio than that of a
small sized fund.
Portfolio Turnover Ratio- Portfolio Turnover Ratio is the percentage of a fund's holdings that have changed in a given
year. This ratio measures the fund's trading activity, which is computed by taking the lesser of purchases or sales and
dividing by average monthly net assets.
Alpha-The simplest definition of an alpha would be the excess return of a fund compared to its benchmark index. If a
fund has an alpha of 10%, it means it has outperformed its benchmark by 10% during a specified period.
92. Describe the process of ASBA?
Application Supported by Blocked Amount (ASBA) refers to an application mechanism for subscribing to initial public
offers (IPO).The system, which ensures that the applicant's money remains in his/her bank account till the shares are
allotted, was introduced by Sebi for retail investors in 2008. Now it has been extended to corporate investors and HNIs
as well (from January 1, 2010, onwards).The mechanism requires the applicant to give an authorisation to block his/her
application money in the bank account for subscribing to the IPO. His/her bank account is debited only after the basis of
allotment is finalised, or the IPO is withdrawn or fails
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the stock exchange. Bids which are not uploaded into the electronic book are not considered for the purpose of
allotment. The Syndicate Member/Broker , then submits the bid with cheque to the bankers. In case of online
application, the Syndicate Member/Broker generates the electronic application form and submits the same to the
registrar with proof of having paid the bid amount.
98. What is Risk? Systematic and Unsystematic Risk?
Investment risk is associated with the probability of low or negative future returns. It is divided into 2 parts-Systematic
Risk & Unsystematic Risk.
Systematic Risk or Market risk is that part of the risk which cannot be eliminated, and it stems from fac-tors which
systematically affect most firms, such as war, inflation, recessions, and high interest rates. It can be measured by the
degree to which a given stock tends to move up or down with the market. Thus, market risk is the relevant risk, which
reflects a securitys contribution to the portfolios risk.
Unsystematic Risk or Diversifiable risk is that part of the risk of a stock which can be eliminated. It is caused by
events that are unique to a particular firm.
99. Explain the concept of CAPM, Efficient Frontier, SML & CML
The CAPM holds that, in equilibrium, the expected return on risky assets E(R) is the risk-free rate R(f) plus a beta-
adjusted market-risk premium. Beta measures systematic risk. CAPM Formula=R (f) + ( E(R) R (f))
Efficient Frontier-Assuming Investors are risk-averse; investors prefer the portfolio that has the greatest expected
return when choosing among portfolios that have the same standard deviation of returns. Those portfolios that have the
greatest expected return for each level of risk (Standard deviation) make up the efficient frontier.
CML- The line of possible portfolio risk & return combinations given the risk-free rate & the risk & return of a portfolio of
risky assets is referred to as Capital Allocation Line (CAL).For an individual investor, the best CAL is the one that offers
the most preferred set of possible portfolios in terms of their risk & return. If each investor has different expectations
about the expected returns of, standard deviations of, or correlation between different risky asset returns each investor
will have a different CAL. Under the Modern Portfolio theory the assumption is that investors have homogenous (Same)
Expectations (Same risk, return etc.) meaning investors will have the same optimal risky portfolio & CAL. Under this
assumption the optimal CAL for any investor is the one that is just tangent to the efficient frontier. This optimal CAL for
all investors is termed the Capital Market Line.
SML- It is the representation of the CAPM model. It displays the expected rate of return of an individual security as a
function of systematic, non-diversifiable risk.
100. Explain Sharpes Single Index Model
A single factor model with the return on the market, Rm as its only risk factor can be written as E - Rf = (E(Rm) R(f)
Here, the expected excess return (Return above the risk-free rate) is the product of the factor weight or factor sensitivity,
Beta & the risk factor which in this model is the excess return on the market portfolio or market index, so this is
sometimes also called Single-Index Model.
101. Explain Arbitrage Pricing Model (APT)
The APT developed by Ross holds that there are four factors which explains the risk premium relationship of the
particular security. Several factors been identified e.g. Inflation, interest rate, money supply, industrial production &
private consumption have aspects of being inter related.
According to CAPM E(r) = R (f) + (), Where - Average Market Risk Premium
In APT E( r) = R(f) + 1 1 + 2 2 + 3 3 + 4 4
Where 1 ,2, 3, 4 are average risk premium of the four factors in the model & 1 ,2, 3, 4 are measures of
sensitivity of the particular security to each of the fur factors.
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age, health, responsibilities, other assets, portfolio needs
Need for income, capital maintenance, Liquidity
Attitude towards risk,
Taxation Status
Portfolio objectives are defined with reference to maximising the investors wealth which is subject to risk. The higher
the level of risk borne the more the expected returns.
Investment strategy covers examining a number of aspects including balancing fixed interest securities against equities,
Finding the income of the growth portfolio, Balancing transaction cost against capital gains from rapid switching,
Retaining some liquidity to seize upon bargains.
Diversification reduces volatility of returns & risks & thus adequate equity diversification is sought. Balancing of
equities against fixed income securities is also sought.
Selection of individual investments is made on the following principles-Finding the intrinsic value of the share &
comparing with the current price(Fundamental Analysis) or Trying to predict future share prices from past share price
movement(Technical Analysis),Expert advice is sough besides study of published accounts to predict intrinsic value,
Inside information is sought & relied upon to move to diversified growth companies, companies with good asset backing,
dividend growth, high quality management with appropriate dividend paying policies, & leverage policies are traced out
constantly to make selection of portfolio holdings.
In India most of the stock brokers & follow the traditional approach for selecting portfolio for clients.
Modern Portfolio Theory
Originally developed by Harry Markowitz in the year 1950s, portfolio theory sometimes referred as Modern Portfolio
Theory-provides a logical/mathematical framework in which investors can optimize their risk & return. The central plant
of this theory is the theory is that diversification through portfolio formation can reduce risk, and return is a function of
expected risk.
Harry Markowitz is regarded as father of Modern Portfolio Theory. According to him investors are concerned with two
properties of an asset, risk & return. The essence of this theory is that risk of an individual asset hardly matters to an
investor. What matters is the contribution it makes to the investors overall risk. By turning this technique into useful
technique for selecting the right portfolio from a range of different assets, he developed the mean-variance analysis in
1952.
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Sponsor
Akin to the Promoter of the company,
Contribution of minimum 40% of net worth of AMC,
Possess sound financial record over five years period,
Establishes the Fund,
Gets it registered with the SEBI,
Forms a trust, & appoints Board of trustee.
Trustees
Holds assets on behalf of unit holders in trust,
Trustees are caretaker of unit holders money,
Two third of the trustees shall be independent persons (not associated with the sponsor),
Trustees ensure that the system, processes & personnel are in place,
Resolves unit holders GRIEVANCES,
Appoint AMC & Custodian, & ensure that all activities are accordance with the SEBI regulation.
Custodian
Holds the funds securities in safekeeping,
Settles securities transaction for the fund,
Collects interest & dividends paid on securities,
Records information on corporate actions.
Asset Management Company
Floats schemes & manages according to SEBI,
Cannot undertake any other business activity, other than portfolio mgmt services,
75% of unit holders can jointly terminate appointment of AMC,
At least 50% of independent directors,
Chairman of AMC cannot be a trustee of any MF.
Distributor / Agents
Sell units on the behalf of the fund,
It can be bank, NBFCs, individuals.
Banker
Facilitates financial transactions,
Provides remittance facilities.
Registrar & Transfer Agent
Maintains records of unit holders accounts & transactions
Disburses & receives funds from unit holder transactions,
Prepares & distributes a/c settlements,
Tax information, handles unit holder communication,
Provides unit holder transaction services.
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Buy and hold policy: where no change is effected and portfolio mix of debt equity is allowed to drift.
Constant mix policy: where the desired target proportion of debt and equity is maintained when relative values
of debt and equity in the portfolio changes. E.g. if the target debt equity mix was 50:50 portfolio rebalancing is
done to maintain this target of 50:50 when any changes takes place in their market values.
Portfolio insurance policy: increasing the exposure to stocks when portfolio appreciates in value and vice-
versa.
Portfolio updating: This involves re-assessing the risk-return characteristics of various securities, selling the
over priced securities and buying the under priced securities. It also entails other change the investor may
consider necessary to enhance the performance of the portfolio.
113. Distinguish between Active Portfolio Management v/s Passive Portfolio Management
Active Portfolio Strategy:
An active portfolio strategy is followed by most investment professionals and aggressive investors who strive to earn
superior returns after adjustment for risk. It involves aggressive management of portfolio with a view to obtain superior
risk adjustment return. The four principal areas of an active strategy are:
Market Timing: In this case according to the market trend forecasts, the portfolios are churned. E.g. if equity stocks are
likely to perform better then bond market then the proportions of equity is increased in the portfolio and vice versa. It is
obvious that switching from offensive and defensive portfolio is subject to risk.
Sector Rotation: Sector or group rotation may apply to both the stocks based on their assessed outlooks. For e.g. if
infrastructure and engineering goods sectors would do well in the forthcoming period then stocks portfolio should be
titled more towards these sectors.
Security Selection: Security selection involves a search for under-priced securities. If we resort to active stocks
selection we may employ fundamental and / or technical analysis to identify stocks which seem to promise superior
returns.
Use of Specialization Investment Concept: A fourth possible approach to achieve superior returns is to employ a
specialized concept or philosophy particularly with respect to investment in stocks. Some of the concept that have been
exploited successfully by investment practitioners are Growth stocks, Technology stocks, Cyclic stocks
Passive Strategy:
The passive strategy is based on the premises that the capital market is fairly efficient with respect to the available
information. It involves adhering to the following guidelines:
Create a well-diversified portfolio at a predetermine level of risk.
Hold the portfolio relatively unchanged over times, unless it becomes inadequately diversified or inconsistent with the
investors risk return preference.
114. Distinguish between Discretionary Portfolio management services v/s Non-Discretionary Portfolio
management services
The discretionary portfolio manager individually and independently manages the funds of each client in accordance
with the needs of the client.
The non-discretionary portfolio manager manages the funds in accordance with the directions of the client.
115. Explain Cost of Carry-The cost of carry summarizes the relationship between the futures price and the spot price.
It is the cost of "carrying" or holding a position from the date of entering into the transaction up to the date of maturity. It
measures the storage cost plus interest that is paid to finance the asset less the income earned on the asset. As far as
Equity Derivatives are concerned the Cost of Carry represents the "Interest Cost".
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Reverse Carry Arbitrage- Traders sell shares and buy stock futures to profit from the price differences. The strategy is
just the opposite of a regular cash-futures arbitrage.
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