Chapter 1: PRINCIPLES AND CONCEPTS OF INVESTMENTS

1. Which of the following refers to the process of deploying money, finances or funds with the expectation
of getting returns in due course of time?
a. Investment b. Savings
c. Trading d. Risk aversion
2. It is important to understand the amount of risk that an investor can bear as all investment schemes carry some
form of risk with them. (True/False)
3. Financial instruments are key components of the modern financial market system as they allow for
efficient flow of capital through the global financial market place.
4. In general, bonds are considered riskier and more volatile than stocks. (True/False)

5. Marketable equity securities includes shares of common stock and most preferred stock which are traded
on a stock exchange and for which there are quoted market prices.
6. What is an indirect investment?
Indirect investments are the one that are made in securities by purchasing shares of an investment
organisation.
7. Which of the following is not a non-marketable financial instrument?
a. Government savings bonds
b. Current accounts
c. Non-negotiable certificate of deposits
d. Money market deposit accounts
8. Non-marketable financial instruments are risk-free and safe investments that are traded in private
transactions.
9. Money market refers to the market where borrowers and lenders exchange short-term funds to solve their
liquidity needs.
10. Capital market is wider than the securities market and embraces all forms of lending and borrowing,
whether or not evidenced by the creation of a negotiable financial instrument. (True/False)
11. Which of the following is computed on the basis of bonds selected according to certain parameters?
a. Bond index b. Stock index
c. Share value d. Debt value
12. Stock and bond market indexes are used to construct index mutual funds and Exchange-Traded Funds
(ETFs) whose portfolios reflect the components of the index. (True/False)
13. A financial asset is an asset whose value is based on some Contractual entity.
14. Which one of the following is not a factor to be considered while investing in financial assets?
a. Risk involved b. Market dynamics
c. Nature of economy d. Income of investor
 15. Trading mechanics is the process of buying and selling of stocks from the stock exchanges.
16. To buy or sell shares, an investor needs to place an order through a broker member. (True/False)

Key Words
• Debt: It is amount of money that is borrowed by a party from another one.
• Debentures: It is a long-term security that is not secured by physical assets or collaterals.
• Equity: It is a representation of ownership through stock or any other security.
• Index: It is a fictitious portfolio, in which securities represent a particular market or a portion of it.
• Mutual Fund: It is an investment programme, in which shareholders trade in diversified holdings. It is a
professionally man- aged programme.
• Exchange Traded Fund: It is a security similar to index funds, which can be traded during the day.

Chapter 2: RETURN ON INVESTMENT

1. Return on investment is always guaranteed. (True/False)
2. Return on investment involves probabilities. (True/False)
3. Variance can never be negative.
4. Variance is a measure of Risk

5. Risk is always there in the portfolio that promises high returns.

6. ROI is the same as profit. (True/False)
7. ROI considers the return of the original principal in cash flows. (True/False)

8. An investor needs to study the relationship between risk and return of the various schemes in
a portfolio.
9. Variance is the difference between the expected value and the actual value.

10. Return on common stocks refers to the Profit generated by an organisation with the money invested by
the shareholders.
11. Net income for calculating return on equity includes dividends to preferred stock. (True/False)
12. While calculating ROE, the weighted average of the number of shares during the year are used if new
shares are issued.
13. We can estimate the return of a portfolio without using historical data. (True/False)

14. Normal distribution is Bell shaped.

15. Lognormal distribution is widely used in finance as it is assumed by many investors that stock prices
are distributed lognormally.
Key Words
• Probability: It is the likelihood of the happening or non- happening of an event or activity. It is used to find
the expected return on investment and may or may not materialize
• Expected value: It is the return which the investor expects by making an investment.
• Return on Equity (ROE): It is the amount of return earned by an organisation from the investment made by
common shareholders.
• Return on Investment (ROI): It is the measure of determining the return from an asset and the indicator of
profitability of an organisation.
• Variance: It is used to measure the degree of risk in an investment.

Chapter 3: RISK AND RETURN OF PORTFOLIO

1. Define portfolio return.

Portfolio return can be defined as the monetary return experienced by the holder of a portfolio.
2. The main components of portfolio return are dividends and capital appreciation

3. If we change the proportion invested in bonds, there will be no effect on the expected return.
(True/False)
4. Define variance. Variance is a measure of the dispersion of a set of data points around their mean
value.
5. Variance is a mathematical expectation of the average-squared deviations from the mean.
6. Volatility can help to measure the risk that an investor might take on when purchasing a particular
security. (True/False)
7. Standard Deviation measures the dispersion of actual returns around the expected return of an
investment.
8. The Sharpe ratio is a measure that determines the degree to which two variable’s movements are
associated. (True/False)
9. If an investor wants to invest in the market but does not want to take much risk, he will prefer to invest
in Blue chip.
10. If the beta of a stock is 1, then it will move in tandem with the market. (True/False)
11. Variance of a portfolio is generally less than the weighted average of the variances of individual asset returns
in the portfolio. (True/False)
12. What is the portfolio return for an N asset portfolio?

For an N asset portfolio, the portfolio return is only the sum of the asset returns multiplied by the
weights each of the assets that are in the portfolio Refer section 3.9 for details.
13. The sum of all the weights must be 1. (True/False)

14. The sum of the weighted return of a portfolio is called Expected return of the portfolio.
Key Words
• Assets: A balance sheet item representing what a firm owns.
• Portfolio: A range of investments held by a person or organisation.
• Returns: Benefit to the investor resulting from an investment
• Variance: Measure of the dispersion of a set of data points around their mean value.
• Correlation Coefficient: Correlation coefficient is the measure of the relationship between two variables.
• Covariance: Covariance is a measure of the movement of two or more assets with respect to each other.
• Risk premium: Return that an investment generates over and above the risk-free interest.
• Alpha: Alpha is a measure of performance of a stock or portfolio on a ‘risk-adjusted basis’.
• Beta: Beta is the measure of volatility of an individual security or the portfolio as a whole compared to the
market as a whole.

Chapter 4: DIVERSIFICATION OF RISK

1. Systematic risk is also known as market risk. (True/False)
2. Unsystematic risks are those risks that are specific to any industry or company.

3. Lower risk is associated with higher standard deviation. (True/False)

4. In a portfolio consisting of two portfolios, the return depends on the Proportion of the risky and risk-free
asset in the portfolio.
5. In case the risky asset provides a market return instead of a single-asset return, CAL formed is called Capital
Market Line (CML)
6. The Sharpe portfolio optimisation is a strategy that uses Sharpe ratio for allocating assets.
7. A higher Sharpe ratio indicates lower returns from a fund relative to the risks involved. (True/False)
8. We can calculate the Sharpe ratio with the help of expected return and standard deviation, and the
Risk-free rate.
9. Beta refers to the measure of Systematic risk of an asset or a portfolio compared to the systematic risk of the
entire market.
10. Beta = 0, signifies that the values of securities would appreciate with the market. (True/False)

11. Modern Portfolio Theory (MPT) was given by the Nobel laureate economist Harry Markowitz
12. The Sharpe Single Index Portfolio Selection method observes that most assets yield returns in relation to the
overall yield in the market.
13. Mutual funds are not good tools for diversifying a portfolio and managing risks. (True/False)
14. Debt-oriented mutual funds provide a fixed return with a very low risk level. (True/False)

Key Words
• Variance: It is a measure of the spread of a set of numbers.
• Standard deviation: It is a measure of the amount of dispersion from the average.
• US Treasury bill: It refers to a short-term debt obligation that is backed by the US government.
• Capital asset pricing Model: It refers to a model that describes the relationship between risk and expected
return. CAPM is mainly used for pricing of risky securities.
• Exchange traded fund (etf): It refers to an investment fund that is traded on stock exchanges, much like
securities.

Chapter 5: MODERN PORTFOLIO THEORY

1. The Expected utility theory implies a hypothesis related to an individual’s choice with respect to
preferences that have unknown results.
2. Expected Utility Hypothesis states that companies or investors choose to maximise the expectation of utility
rather than Monetary values
3. In case of a portfolio consisting of two assets, we can draw the Portfolio possibility curve by determining
the expected return and risk involved in the different combinations of the two securities.
4. The relationship securities have with one other is an essential part of an effective Frontier
5. The efficient frontier is curved as there is a retreating marginal return to risk.
6. The government, with treasury bills, is basically agreeing to borrow a specific amount of money that it
will compensate at the date of the bill’s maturity. (True/False)
7. The HM model is also known as Mean variance model because of it is dependent on the expected returns
(mean) and the standard deviation (variance) of different portfolios.
8. Markowitz’s hypothesis emphasizes on the relevance of portfolios, risks, and correlations between
securities and diversification. (True/False)
9. Which of the following is false?
• Markowitz’s portfolio hypothesis would be a huge initiative for the formation of the capital asset
pricing model.
• After Markowitz’s theories, investors focused on what was placed on picking single high-yield
stocks without any consideration to their impacts on portfolios as a whole.
10. Beta is a measure of volatility faced by a financial asset a portfolio or a project outcome.
11. Sharpe’s single index model will increase market-related risk and make the most of the returns for a
provided level of risk. (True/False)
12. Which of the following is true?
• The return on securities rises or limits based on a least extent in the market index.
• Sharpe’s single index model will lessen the market-related risk and make the most of the
returns for a provided level of risk.
13. As per the Sharp’s model, the hypothesis shows the anticipated return and variance of indices which may
be one or more and are linked to financial activity. (True/False)
14. Sharpe’s single index model is also called as Market model.
Key Words
• Market index: A stock index or stock market index is a measurement of the value of a section of the stock
market.
• Standard deviation: In statistics and probability theory, the standard deviation (SD) (represented by the
Greek letter sigma, measures the amount of variation or dispersion from the average.
• Utility Hypothesis: The expected utility is calculated by taking the weighted average of all possible outcomes
under certain circumstances, with the weights being assigned by the likelihood, or probability, that any
particular event will occur.
• Market index: It refers to the aggregate value that can be produced by taking a combination of stocks and
other investment instruments and determining their total value against an aggregate value on a specific date.
• Risk free return: It refers to the rate of return of investment instruments that involve zero risk.
• Algorithm: Used mostly in mathematics and computer science, it is a step by step procedure for calculating
certain values.
• Utility function: It is a function specifying the total utility de- rived by consumers from all combinations of
goods.
• Credit rating: It is a measure of the credit worthiness of a debtor.
• Simplex Method: It is a very commonly used algorithm used to solve linear programming problems.

Chapter 6: ASSET PRICING PRINCIPLES

1. The theory that probable return goes up with increase in risk is known as Risk return trade-off
2. Low levels of uncertainty are linked to low potential returns.
3. Several securities are marked on an SML graph. (True/False)
4. All accurately price securities are marked on an SML. (True/False)
5. Capital asset pricing model is based on amount of impractical suppositions.
6. Contrary to CML, SML demonstrates the anticipated returns of each asset. (True/False)
7. Since the CML graph describes competent portfolios, SML graphs describe both proficient and Non-
efficient portfolios
8. SML ascertains that each asset is accurately priced. (True/False)
9. A line that shows systematic, or market, risks against return of all market at a particular time and
demonstrates all risky marketable securities is:
a. CML b. CMPM
c. SML d. None of the above
10. All security factors are ascertained by SML, where the market portfolio and risk-free assets are ascertained by
the CML.
11. CAPM is a profitable tool for knowing the risk return connection in spite of its restrictions. (True/False)
12. Stability of beta is the measure of securities' Future risk.
13. CAPM considers to be the relevant measure of risk of a security. Beta
 14. CAPM recognises the fact that an investor can expect to be compensated for taking the risk that cannot
be mitigated through diversification. (True/False).

Key Words
• CAPM: It defines the connection between risk and expected re- turn which in turn is used in the pricing of
risky securities.
• CMl: A line which is used in CAPM to show the rates of return for efficient portfolios based on the risk-free
rate of return and the state of risk (standard deviation) for an accurate portfolio.
• SMl: A line that demonstrates the systematic, or market, risk against the return of the whole market at a
particular time and demonstrates all risky marketable securities.
• Beta: It is a measure of the volatility of a particular stock in comparison with the volatility of the market.
• Risk-free rate: It refers to the rate of return given by an asset that does not involve any risk.
• Public Sector Undertaking: These are the government owned companies in India.
• National Savings Certificate: It is a saving bond issued by the government of India.
• Financial economics: It is a branch of economics that involves concentration of monetary activities.
• Risk premium: It refers to the return in excess of the risk- free rate that an investor expects to receive for
taking certain amount of risk.

Chapter 7: ASSET PRICING PRINCIPLES

1. What is APT?
Arbitrage Pricing Theory (APT) is a model used for identifying an asset, which is priced incorrectly,
i.e. either the asset is undervalued or overvalued.

2. The rule of one price of the APT model states that in efficient market, security must have a single
price, disregarding its origin
3. The APT model takes into consideration only macroeconomic factors for determining the asset price.
(True/False)
4. The APT model assumes that the investor holds a number of securities for eliminating Unsystematic
risk.
5. One of the assumptions of the APT model is that markets are imperfect. (True/False)
6. According to the APT model, if market equilibrium is achieved, then there will be no riskless arbitrage
opportunities available in the market
7. Factor modeldepicts the relationship between a set of factors and assets’ return.
8. The APT model helps investors to identify the factors to which a particular sectors or industry is
sensitive to. (True/False)
9. A portfolio manager can also forecast the movement of the factor and design the portfolio accordingly.
(True/False)
Key Words
• Arbitrage: It involves the act of purchasing a good in one market and selling it in another market at a higher
price after a period of time.
• Systematic risk: It is the risk that affects the whole market.

Chapter 8: PORTFOLIO ANALYSIS TECHNIQUES

1. The factor included in industry analysis is:
a. Fiscal policy
b. Monetary policy
c. Inflation
d. The nature of the industry
2. Economic analysis is the analysis of the economic feasibility of an organisation to judge its
performance in the market.
3. Company analysis is based on financial statements for the period not less than three years. (True/False)
4. What is a financial statement?
Financial statement is the one that depicts the financial state of company at the end of a specified
period.
5. Which one is NOT a financial statement?
a. Income statement
b. Cash flow statement
c. Deposits
d. Balance sheet
6. A financial statement cannot be designed using ledger accounts alone. (True/False)
7. The cost of running a business include:
a. Consensus earnings
b. Wages
c. Shares
d. Stock analyst
8. Consensus estimates can increase or decrease the prices of stocks.
9. If a company exceeds its consensus estimates, its stock price increases. (True/False)
10. How is the P/E ratio calculated?
Price-to-earnings (P/E) ratio is determined by dividing the stock price per share of an organisation by its
EPS.
 11. A high P/E ratio indicates that investors expect higher earnings in the future.
12. When the P/E ratio is based on projected growth, it is guaranteed that estimates will be accurate.
(True/False)
13. In technical analysis, the analyst studies the supply and demand of securities to find patterns.
(True/False)
14. Stock Volume means the number of shares traded in a security or in the entire market at a particular
period.
15. The secondary trend involves movement against the primary trend. (True/False)

16. Technical analysis is centered on the financial statements. (True/False)

17. Fundamental analysis considers assets, liabilities, revenues, and expenses of a company to predict stock
prices.
18. Technical analysis study the market to predict the future performance of stocks.
19. Average Directional Index (ADX) indicates whether a particular stock is trending or oscillating.
20. A Breadth indicator refers to the mathematic formula that helps in calculating market participation.
21. Technical indicators are heavily used by long-term investors. (True/False)

Key Words
• Accumulation/distribution: It is an indicator that helps in contemplating demand and supply of stocks
by analysing buying/ selling trends of investors.
• Dow Theory: It is a type of technical analysis in which the stock price movements are studied along
with some aspects of sector rotation.
• Indicator: These are the factors that depict the current economic and industry conditions of a market.
• Investor Speculation: It refers to the act of engaging in financial transaction that has significant risk of
losing while attempting to gain from market fluctuations.
• Risk and return: A concept whereby an investor must realize that unless he/she take certain risk it is
impossible to achieve a return on their investment.
• Risk tolerance: The ability of an investor to handle value depreciation of his/her portfolio.

Chapter 9: EFFICIENT MARKET THEORY

1. What do you mean by an efficient market?

An efficient market is the one in which the market price of an asset changes on a random basis but with
a valid and unbiased reason.
2. It is possible that an efficient market does not have the market price of an asset equal to its true value.
(True/False)
3. In an efficient market, assets having a higher P/E ratios may not be under-valued compared to the assets
having lower P/E ratios. (True/False)
4. Anomalies indicates market inefficiency with respect to an underlying asset-pricing model.
 5. The initial studies on market efficiency emphasised on the relationship between the changes in prices of
an asset and time. (True/False)
6. The Random Walk Theory states that the movement of stock market prices is random and cannot be
predicted.
7. Weak form tests shows that the market is inefficient and does not reflect all information of the market.
(True/False)
8. Semi-strong form tests depict that the market is reflects both public and private market information.
(True/False)
9. The stock price generally rises just before and after a company announces a stock split. This increment in
prices is known as the Stock Split Effect.
10. If stock price movement continues to take place quite a long time after the announcement of news, it is
called short-term price drift. (True/False)
11. According to Monday Effect, there is a general tendency of the stock prices to go down on Mondays.
(True/False)
12. The price appreciations taking place in the small-cap stocks tend to be higher than the same of the large-
caps stocks. (True/False)
13. In a stock split, the number of outstanding share is increased and the values of the outstanding shares
are decreased.
14. Stock prices have a general tendency to go up in the month of january

Key Words
• Arbitrage: It refers to the simultaneous buying and selling of financial instruments to take advantage of
variations in prices for the same asset.
• Auto Correlation: It is a situation, in which historical values influence time series data.
• Efficient Market: It refers to the market where there is complete information availability.
• January effect: It is a seasonal anomaly, wherein the prices of securities increase in the month of January
more than in any other month.
• Market anomalies: These are incidences of market inefficiencies that are against the efficient market theory.
• Monday effect: It is a tendency of a market to show lower re- turns that other days in the week.
• Price/earnings ratio: It is a valuation method used for comparing a company’s current share price to its per
share earnings.
• Regression: It is a statistical measure used to determine the relationship between a dependent variable and
independent variable.

Chapter 10: EVALUATION OF PORTFOLIO PERFORMANCE

1. Effective performance of portfolios depends a great deal on extensive research of market conditions.
(True/False)
2. Asset allocation is all about classifying an investment portfolio into three asset categories.
 3. Effective asset allocation is sufficient for an organisation to achieve its financial goals. (True/False)
4. An assessment of the profit rate for an asset or portfolio of assets is called Money weighted rate of return
5. Which method is used to evaluate the past performance of an investment portfolio along with exterior
flows? The modified Dietz return method
6. Unlike the Dietz or internal rate of return, the true time weighted return does not use money weighted
estimations. (True/False)
7. Risk adjusted performance measures are the metrics that analyse the return on investment with a few
alterations for the threat. (True/False)
8. Which method ascertains the performance of an investment by regulating the risk? Sharpe ratio
9. The Treynor ratio method is used to estimate how well a portfolio has compensated its investors at the
given risk level.
10. Which of the following methods is based on the perception that assets that are more vulnerable have more
anticipated returns as compared to less vulnerable ones?
• Sharpe ratio
• Treynor ratio
• jensen’s alpha
11. Mutual funds are subject to many risks, especially in the case of highly concentrated portfolios.
12. Money invested in mutual funds is generally liquid; thus investors can redeem these funds on demand and
collect their money. (True/False)
13. An investment cannot be sold whose value is increasing since there is no one to buy them. (True/False)
14. The S&P 500 Index is market-cap-weighted, which means that the value of individual stocks in the index
relies on the value of the stock market.
Key Words
• Alpha: It is the excess return of a security relative to the return of the benchmark index.
• Beta: It is a measure of the volatility or systematic risk of a security/portfolio compared to the market
portfolio.
• Correlation Coefficient: It is a used to measure the degree to which two variables move in relation to one
another.
• Internal rate of return: It is the discount rate used in capital budgeting at which the net present value of an
investment be- comes zero.
• Market index: It is a metric that tracks the performance of a group of stocks in the market.
• Risk tolerance: It is the ability or willingness of an organisation to drop some or all of its investment in
exchange of higher potential returns.
• Standard deviation: It is a measure of the dispersion of a set of data from its mean. The more distributed the
data, higher is the deviation.
• Time Horizon: It refers to the expected time duration (in months, years, or decades) an organisation is likely
to invest in order to achieve a specific financial goal.