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Capital MArket MCQ
Capital MArket MCQ
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.
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.
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.
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.
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.
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.
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.
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.