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Paper XX.

Investment Management

Ch. 1.

2010

1. What is depository system? How is depository system useful for investors? (6 marks) [2010]

2009

2. What factors should an investor consider while making investment decision? (6) [2009]

3. What do you mean by investment decision process? How is it going to help an Investor in

making a sound investment decision? (6) [2009]

2008

4. Investments involve long-term commitments. Comment. (6) [2008]

5. "Investment is carefully planned speculation." Comment on this statement. (6) [2008]

Ch. 2.

2009

1. What is a money market? How is it different from capital market? (6) [2009]

2. Explain in short the components of a financial system. (6) [2009]

2008

3. Briefly explain the different kinds of investment outlets available to an investor. (6) [2008]

Ch. 3.

2010

1. The rate of return of securities of ABC Ltd. and XYZ Ltd. in different market conditions is as

follows:

Market Condition Probability Rate of Return

ABC Ltd. XYZ Ltd.

Bearish' 0.30 15% 20%

Normal 0.30 20% 30%

Bullish 0.40 30% 40%

Find out the expected return and risk (0') for the securities of two companies. If an investor

invests Rs. 3,00,000 in ABC Ltd. and Rs. 2,00,000 in XYZ Ltd., what will be the expected

return of the investor? (9) [2010]

2. Mr. Gupta makes an Investment at Rs. 50. The year end price of this investment under

different market conditions with equal probabilities is as follows:

Condition Year end Price (Rs.)

Bullish 75

Normal 60

Bearish 45

(i) Find out the expected value of return for one year period and risk (0') of the return.

(ii) Also calculate inflation adjusted return if rate of inflation during the year is 8%. (9) [2010]

2009

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3. In a portfolio of the company Rs, 2,00,000 have been invested in asset X which has an

expected return of 8.5%, Rs, 2,80,000 in asset Y which has an expected return of 10.2% and Rs.

3,20,000 in asset Z which has expected return of 12%. What is the expected return for the

portfolio? (9) [2009]

4. Mr. A has a portfolio of five securities whose expected return and amount invested are as

follows. (9) [2009]

I II III IV V

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Amount 1,50,000 2,50,000 3,00,000 1,00,000 2,00,000

Expected

Return 12% 9% 15% 18% 14%

Find out the % expected return of the portfolio.

5. Find out the expected return and standard deviation thereof in respect of the following investment: (9)

[2009]

Return Probability

1% 20%

7% 20%

8% 30%

10% 10%

15% 20%

2008

6. The return on security 'X' and security 'Y' under different situations is given below. Find its risk and

return: (9) [2008]

Probability Security Security

X Y

0.3 10 12

0.4 12 13

0.3 15 14

Ch. 4.

2010

1. Mr. X considering investment in securities P and Q whose details are given below:

P Q

Expected return 13% 16%

Risk (standard deviation) 4% 7%

If a portfolio of 30% of P and 70% of Q is formed, find the:

(i) Expected return of the portfolio

(ii) Minimum risk of the portfolio

(iii) Maximum risk of the portfolio. (9) [2010]

2009

2. The following are the expected return R and risk 0 of two securities A and B: (9) [2009]

R 0

A 10% 20%

B 12% 25%

The correlation coefficient between the returns of A and B is 0.5. An investor is to decide about the

portfolio of A and B as 75% + 25% or 25% + 75%. Which one should he accept?

2008

3. The following information is available from Z in respect of his portfolio:

Security Weight Expected Return Standard Deviation

A 50% 20% 24%

B 50% 12% 16%

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(i) Find out the correlation between the return if the standard deviation of the portfolio is 20%

or 18%.

(ii) Find out the standard deviation of the portfolio comprising A and B in the ratio of 25% and

75% respectively. (9) [2008]

4. Two securities A and B have a variance of 13 and 12 and expected returns of 15% and 12%

respectively. The covariance between the returns is 3. Find out the risk and return of the

following portfolios: (9) [2008]

A B

(i) 0.2 0.8

(ii) 0.7 0.3

(iii) 0.5 0.5

Ch. 5.

2010

1. (a) "Market interest rate and debenture prices are inversely related." Comment. (6)

(b) V.K.Arora is considering investing in bond currently selling for Rs. 8,785.07 (Eight

thousand seven hundred eighty five and seven paisa). The bond has four years to

maturity, Rs. 10,000 face value and a 8% coupon rate. The next annual interest payment

is due one year from today. The appropriate discount factor for investment of similar risk is

10%.

(i) Calculate the intrinsic value of the bond. Should Mr. Arora purchase the bond?

(ii) Calculate YTM of the bond. (9) [2010]

2. (a) Explain the process of credit rating of debt instruments adopted by credit rating agencies.

(6)

(b) Mr. Sachin is being offered a scheme in which he has to deposit Rs. 18,250 now which wi ll

give him year end return of Rs. 5,000 for each of next 5 years. Should he accept the offer if

his required rate of return is:

(i) 10% (ii) 12% (9) [2010]

2009

3. A had purchased a bond at a price of Rs. 800 with a coupon payment of Rs. 150 and sold it

for Rs. 1,000. (9) [2009]

(i) What is the holding period 'return?

(ii) If the bond is sold for Rs. 750 after receiving Rs. 150 as coupon payment then

what is his holding period return?

4. (a) Write short notes on the following: (6)

(i) Zero-interest fully convertible bonds;

(ii) Bond Indenture.

(b) An investor is considering the purchase of the following bond: (9) [2009]

Face Value Rs. 100

Coupon Rate 11%

Maturity 3 yrs.

(i) If he wants a yield of 13%, what is the maximum price he should be ready to pay

for?

(ii) If the bond is selling for Rs. 97.60, what should be his yield?

5. (a) What do you mean by credit rating? How is credit rating relevant for investors? (6)

(b) The following information is available in respect of a bond:

Face value Rs. 10,000

Market price Rs. 8,790

Coupon Rate 8%

Investors yield 10%

Time to maturity 4 years

Find out the YTM and Intrinsic value of the bond. Should an investor buy this bond based on the YTM

and intrinsic value? (9) [2009]

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2008

6. (i) An investor purchased a bond at a price of Rs. 900 with Rs. 100 as coupon payment and

sold it at Rs. 1,000. What is the holding period return?

(ii) If the bond is sold for Rs, 750 after receiving Rs. 100 as coupon payment, what is the

holding period return? (9) [2008]

7. (a) What is a convertible bond? Why do investors prefer a convertible bond over a non-

convertible one? (6)

(b) The following information is available in respect of a bond:

Face value Rs. 10,000

Market price Rs. 8,790

Coupon rate 8%

Investor's yield 8%

Time to maturity 4 years.

Find the YTM and intrinsic value of the bond. Should the investor buy this bond based on the

YTM and intrinsic value? (9) [2008]

Ch. 6.

2010

1. Differentiate between Fundamental Analysis and Technical Analysis. (6) [2010]

2. Explain the Efficient Market Hypothesis and three forms of market efficiency. (6) [2010]

2009

3. Explain the technical analysis. How is it different from fundamental analysis? (6) [2009]

2008

4. What is Dow Theory? Explain its relevance in analysis of securities. (6) [2008]

5. What are the steps followed in fundamental analysis for analysing securities of a company?

(6) [2008]

Ch. 7.

2010

1. ABC companys current share price is Rs. 36 and its last dividend was Rs. 2.40. If dividends

are expected to grow at a constant rate g, in the future, and if required rate of interest (ke) is

12%, what is ABCs expected share price 2 years from now. (9) [2010]

2. A company is expected to grow at 14% per year for the next 4 years and then to grow

indefinitely at the rate of 5%. The required rate of return on equity shares is 12%. Assume

that the company paid a dividend of Rs. 2 per share last year (Do = 2). Determine the market

price of share today. (9) [2010]

3. Calculate the price of an equity share from the' following: (9) [2010]

Equity share capital (Rs. 10 each) Rs. 20,00,000

10% Preference capital Rs. 10,00,000

Retained earnings Rs. 5,00,000

12% Secured loan Rs. 15,00,000

14% Unsecured loan Rs. 10,00,000

Fixed Assets Rs. 30,00,000

Investment in 6% Govt. bonds Rs. 8,00,000

Operating Profit Rs. 25,00,000

Tax rate 30%

P/E Ratio 10

2009

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4. A firm had paid dividend at Rs. 2 per share last year. The estimated growth of the dividends

from the company is estimated to be 5% p.a. Determine the estimated market price of the

equity share if the estimated growth rate of the dividends:

(i) rises to 8%, and

(ii) falls to 3%

Also find out the present market price of the share, given that the required rate of return of the

equity investor is 15.5%. (9) [2009]

5. ABC Ltd. is currently paying dividend of Re. 1 and it is expected to grow at 7% p.a. infinitely. What is the

value if:

(i) The equity capitalisation rate is 15%

(ii) The growth rate is 8% instead of 7%.

(iii) The equity capitalisation rate is 16% and growth rate is 4%. (9) [2009]

6. Equity shares of ABC Ltd. are selling at Rs. 60. The company is expected to pay a dividend of Rs. 3

after 1 year with a growth rate of 8%. Find out the implied required rate of return of the equity investor.

(9) [2009]

2008

7. A company declared a dividend per share of Rs. 5 last year. The dividend is expected td grow

at the rate of 9% p.a. forever. Is it worthwhile to buy the share of Rs. 105 if the company

belongs to a risk class of 14%? (9) [2008]

8. A firm paid a dividend of Rs. 8 per share and the face value is Rs, 10. The dividend is

expected to grow at 5% per annum. The company belongs to a risk group for which equity

capitalization is 12%.

a. What is the intrinsic value of the share?

b. Would the value be different if the risk class was of 15%? (9) [2008]

9. The following information is available of Company X and Z:

Particulars Company

X Z

1. Face value of a share (Rs.) 10 10

2, No. of equity shares issued 5,00,000 8,00,000

3. Equity share capital (Rs.) 50,00,000 80,00,000

4. Reserves (Rs.) 6,00,000 65,00,000

Find Book Value per share.

Ch. 8.

2010

1. What are the types of mutual fund schemes prevalent in India? Give the details. (6) [2010]

2009

2. "Mutual fund is an indirect investment." Examine it in the light of features of mutual funds. (6)

[2009]

3. (a) What is a mutual fund? Outline the functions of an asset management company. (3,3)

(b) A mutual fund has the following investments and expenditures. Find its 'Net Asset Value'. (9) [2008]

Rs.

1. Cash and Bank Balance 6,00,000

2. Debentures and Bonds 5,00,000

3. Equity shares 10,00,000

4. Government securities 8,00,000

5. Expenses 50,000

6. No. of units outstanding 2,00,000

Ch. 9.

2010

1. The current market price of a share is Rs. 105. A call option is available for a premium of Rs. 3

per share and a put option is available for a premium of Rs. 2 per share. Find out the net

payoff of the option-holder of the call option and put option given that:

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(i) The strike price in both cases is Rs.110, and

(ii) The share price on the exercise day is Rs. 100 or Rs. 105 or Rs. 110 or Rs. 120 or

Rs. 130. (9) [2010]

2009

2. What do you mean by forwards? How are they different from futures? (6) [2009]

2008

3. (a) An investor buys 500 shares of X Ltd. @ Rs, 210 per share in the cash market. In order to

hedge, he sells 300 futures of X Ltd. @ Rs. 195 each. Next day, the share price and futures

declined by 5% and 30% respectively. He closes his positions next day by counter

transactions. Find out his profit or loss. (9) [2008]

(b) Distinguish between a 'call' option and a 'put' option. How do you exercise an option? (6)

[2008]

Ch. 10.

1. Outline the reforms introduced by SEBI in primary and secondary market in India. (6) [2010]

Ch. 11.

2010

1. What do you mean by securities Ombudsman? Name some of the grievances for which an

investor can lodge a complaint with the securities Ombudsman. (6) [2010]

2009

2. What do you mean by insider trading? Who is an insider as per SEBI Guidelines? (6) [2009]

2008

3. What are the types of investor grievances dealt by SEBI? (6) [2008]

Misc

Briefly state the procedure of trading in securities in the stock market in India. 6

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