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PRACTICE SET- VIII

1) (A) Beta reflects the systematic risk of the portfolio. (B) Beta reflects the unsystematic risk of the portfolio. A. (A) is correct. B. (B) is correct. C. Both (A) and (B) are incorrect. D. Both (A) and (B) are correct.

2) For maintaining flexible ratio of asset allocation, one should . A. rebalancing the debt/equity allocation very frequently B. keep fixed percentage of equity and debt investments at all times C. generally avoid portfolio rebalancing. D. rebalance debt/equity allocation periodically.

3) (A) Constant proportion portfolio insurance policy (CPPI policy) is the worst policy if the stock market moves in only one direction, either up or down. (B) Constant proportion portfolio insurance policy (CPPI policy) is the best policy if the stock market moves in only one direction, either up or down. A. (A) is correct. B. (B) is correct. C. Both (A) and (B) are correct. D. Both (A) and (B) are incorrect.

4) Principal vectors of an active portfolio strategy are : A. Market timing. B. Sector rotation, C. Security selection D. All of the above.

5) Share holder in a limited company who has paid for the first call is liable for . A. his partially paid-up amount of the shares allotted to him. B. his share in the total liabilities of the company C. fully paid-up value of the shares allotted to him D. only the secured debt of the company.

6) What is the reliable source of pertinent information for the investor in Mutual fund Scheme? A. Advice of distributor. B. AMFI website. C. Financial Press. D. Offer Documents.

7) (A) HPR(Holding Period Return) = (Cash payments received during the period + change in price)/Beginning Price. (B) HPR(Holding Period Return) = (Cash payments received during the period + price at the end of the period )/Beginning Price. A. (A) is correct. B. (B) is correct. C. Both (A) and (B) are correct. D. Both (A) and (B) are incorrect.

8) (A) For a Call Option: Intrinsic Value = Spot price Strike price. Intrinsic value must be positive or zero. (B) For a Put Option: Intrinsic Value = Strike Price Spot Price. Intrinsic value must be positive or zero. A. (A) is correct. B. (B) is correct. C. Both (A) and (B) are correct. D. Both (A) and (B) are incorrect.

9) (A) Share of profit which a partner receives from a firm shall be fully exempt in the hands of the partner. (B) Interest and remuneration which was allowed as deduction to the firm shall be taxable in the hands of the partners.

A. (A) is correct. B. (B) is correct. C. Both (A) and (B) are correct. D. Both (A) and (B) are incorrect.

10) NPV is calculated in the case of a series of . Cash flows. A. Uneven. B. Even. C. Zero. D. Single.

11) Modern Portfolio theory suggests that the portfolio returns can be optimized by .. A. Laddering the bond portfolio. B. Investing in diversified equity funds. C. Moving closer to the efficient frontier in terms of the risk return equation. D. Investing in the treasury bills and equities.

12) If one is a fundamental analyst, he/she would follow which of the following Approaches? A. Passive diversified portfolio approach. B. Quantitative Analysis (searching for undervalued securities). C. Efficient Market Hypothesis- strong D. Efficient Market Hypothesis-weak.

13) Derivatives on gold related securities and gold securities that are traded on the stock exchange are regulated by A. SEBI B. RBI C. Department of Company Affairs D. Company Law Board.

14) The bid-ask spread is 1) Brokers commission

2) Dealers gross income from a transaction 3) Larger for illiquid securities than for liquid ones. A. 1 B. 2 C. 3 D. 1,2 & 3.

15) Priti wants to invest in XYZ Ltds stock, however, she must wait several moths till her Fixed Deposit matures. What type of Option should she invest in to protect against the market value of the stock increasing before her money becomes available ? A. Buy a call option B. Buy a put option C. Write a put option D. Sell a call option

16) The risk of the writer of an option is . A. Market price at expiry. B. Purchase price. C. Limited by the premium D. Unlimited.

17) MFs are allowed to participate in securities lending. A. False. B. True. C. Sometimes. D. Unlimited.

18) The companies in which significant amount of shares are held by the parent who also exerts some influence in the activities is known as . A. Associated Companies. B. Wholly owned subsidiaries. C. Partly owned subsidiaries. D. Unlimited companies.

19) Reciprocal of P/E ratio, E/P ratio measures A. Market price of a share. B. Growth Ratio. C. Cost of Debt. D. Opportunity Cost of Capital.

20) For the Previous Years 2006-07, XYZ Ltd., a domestic company , pays an interim dividend in October 2006 of 15% and a final dividend of 40%. The Distribution tax is payable on A. Both interim and final dividend. B. Only the final dividend. C. Only the interim dividend. D. On neither the interim nor the final dividend.

21) The most important factor determining the value of a property is. A. Physical Attributes B. market/ marketability C. location D. Potential Cash flow.

22) A certificate of Deposit (CD) is a promissory note issued by Banks and Financial Institutions. They form part of A. CRR B. SLR C. both SLR and CRR D. Neither SLR nor CRR.

23) A Systematic Investment Plan helps to manage (i) Volatility Risk (ii) Systematic Risk (iii) Unsystematic Risk A. (i) & (ii)

B. (i) only. C. (ii) only. D. (i),(ii) & (iii).

24) Which of the following statements pertaining to the IRDA Regulations 2000, for the licensing of insurance agents, is not true ? (i) It deals with the issue, renewal and cancellation of licenses. (ii) It includes the code of conduct for agents holding a license. (iii) It talks about the issue of duplicate licenses. A. (i) B. (ii) C. (iii) D. None of the above.

25) Senior Citizens Saving Scheme is governed by which Act ? A. Small Savings & Misc. Savings Act, 1902 B. Banking Regulation Act, 1949 C. Government Savings Bank Act, 1873. D. Companies Act, 1956.

26) Interest rate on Post Office Savings Bank is payable.. A. Monthly. B. Quarterly. C. Half yearly D. Yearly.

27) A convertible preference share, depending upon the terms of issue, may be converted into a common share at the option of the shareholder (i) at the conversion ratio that never changes. (ii) within a limited number of years after the preferred stock is issued (iii) only after a specified number of years have elapsed since the preference share was initially issued.

A. (i) only. B. (i), (ii) & (iii) C. (i) & (ii) only D. (i) and (iii) only.

28. Convertible debentures are valued on the basis of Market Value. A. This statement is false. B. This statement is partly true. C. Sometimes. D. This statement is true.

29) A PPF account was opened on 10th July 1990. It will mature on . A. 1/4/2006. B. 9/7/2005. C. 10/7/2005. D. 11/7/2005.

30) An Option premium is (i) Market price of an underlying. (ii) Difference between the current share price and the strike price. (iii) Profit made on the Option A. Only (iii) is true. B. Only (ii) is true. C. Both (i) & (ii) are true. D. None of the above.

31) A proprietary company can be a subsidiary of a listed company. A. False B. True C. Cannot say. D. Sometimes. 32. Hedging is a device to

A. Minimize losses B. Maximize profit C. None D. Both a & b.

33. Among the four bonds given below, each having a 20years maturity, which one is the most volatile? A. Municipal. B. Treasury. C. Zero Coupon. D. BB-rated corporate.

34. T-bills pay interest to their investors by A. T-bills pay no interest. B. Coupon Interest. C. Possible price appreciation above their discounted price. D. Difference between issue price and face value.

35) Which of the following statements is true for derivatives? A. Option buyer has unlimited loss probability. B. Mr. A buys a future contract in the script Infosys Technology. The profit or loss on this contract will depend on the price movement of NIFTY index. C. Option buyer is called writer. D. Selling a future is called short.

36) Bond prices are sensitive to both coupon rate of the bond and the maturity term of the bond. Bond prices are less sensitive to changes in interest rates when the bonds have A. small coupons and long maturity B. small coupons and short maturity C. large coupons and long maturity D. large coupons and short maturity

37) If the current share prices is S and the set exercise price is X, the intrinsic value of the Call option is.. A. Max(0,S-X) B. Max(0,X-S) C. Min(0,S-X) D. Min(0,X-S)

38) Which of the following is true ? A. Maximum gain in Put option for the buyer is unlimited as share can go up to any price. B. Intrinsic value of a put option is 0 or spot minus strike price, which is more C. Time value in a call option is Premium minus intrinsic value D. Margin is required from option buyer.

39. All stock market indices are most accurately characterized by which of the following statements about the degree to which they co-vary together ? A. They are uncorrelated. B. They are perfectly positively correlated. C. They are highly positive correlated. D. They are negatively correlated.

40. Any lead manager for an IPO of a company requires A. SEBI Category-2 Certificate with 2% fee of issue amount. B. SEBI Category-1 Certificate C. SEBI Category-2 Certificate D. SEBI Category-3 Certificate with 2.5% fee of issue amount.

41. Security (A) has 12% return and 7% Standard Deviation (SD) Security(B) has 18% return and 8% SD A conservation investor should prefer .. A. Security (A) since it has 95% chance of giving +ve returns. B. Security(B) since it has 95% chance of giving +ve returns. C. Security(A) has lower Standrad Derivatives.

D. Security(A) has lower Variance of return.

42. Find Beta of security X if expected market premium is 15%, risk free return is 7% and expected return of security X is 20% ? A. 0.834 B. 0.900 C. 0.700 D. 0.867

43. Shanu buys a call option of Infosys 2040 at Rs.35 and sells a call option of 2010 at Rs. 15. The lot size of Infosys is 100. What is the Maximum profit for Shanu ? Ignore brokerage, STT, Service Tax, etc. A. 4000 B.2000 C. 2500 D. 6000

44. A Companys current dividend is Rs. 6. However it is constantly falling @ 5% per annum. If the discount rate is 15%. What is the value of its share? A. 63.00 B. 23.75 C. 28.50 D. None of the above.

45) If a corporation declares and pays dividend, this transaction will . A. increase liabilities B. reduce stock holders equity C. decrease net income D. not affect total asset.

46) The NAV of a debt oriented Mutual Fund is 22.25 cum dividend. It has declared a dividend of 6%, record date being 25 Jun 2006. Calcualte the dividend recieveable by an individual investor if he holds 10000 units. A. Rs. 5250.0

B. Rs. 6000.0 C. Rs. 5158.5 D. Rs. 4653.6

47) If the post tax rate of return on an investment is 8% and the inflation rate is 5% the real rate of return is . A. 3.5% B. 3% C. 2.86% D. -3%

48) A 6% 2014 GOI Bond of Rs. 100 Face Value trades at Rs. 102 on 15/12/2004. There is a Call Option in 2008. The Yield to Call will be . than the Yield to Maturity. A. Higher B. Lower C. Same D. Cannot Say.

49) If the Buying price of a property is Rs. 20 lakhs, Net income is Rs. 2 Lakhs and Market yield is 8%, the value of the property is Rs. .. A. 20 lakhs. B. 22 lakhs. C. 25 lakhs. D. None of the above.

50) A company offers a right issue of one for two for Rs. 7 each. The current maeket price is Rs. 13. The expected ex-right market price would be Rs. .. A. 9 B. 10 C. 11 D. None of the above.

51) An MF scheme can borrow money up to ..% of its Asset Under Management for maximum .. months.

A. 30%, 3months B. 30%, 12 months C. 10%, for any period D. 20%, 6 months.

52) Gita sold her equity holdings of X Ltd on 1st of July, 2006. The total sale value of the shares was Rs. 75,000/-. The Securities Transaction Tax that Gita is liable to pay would mandatorily be collected by .. A. Stock Exchange B. Mutual Fund C. Income Tax Authority D. Gitas Broker

53. Assume a company has issued Ten lakhs equity shares and its current market price is Rs. 80. Last years Profit was Rs. 90 lakhs out of which Rs. 50 lakhs was distributed as dividend. What is the earning yield ? A. Support level B. Breadth of the Market. C. Short interest. D. Debt- Equity ratio.

54. Have a look at the data given below and answer the query appearing below . Probability 0.10 0.25 0.30 0.25 0.10 Security A ( Return in %) 30 20 0 -5 -10 Security B ( Return in %) 40 25 15 0 -20

Standard Deviation of the Portfolio for equal weightage of securities A & B is. A. 10.29 B. 11.69 C. 12.88

D.14.30.

56) In the context of derivatives, which of the following statement is true ? A) Hedging is a strategy, wherein a small position is created to both in cash market and derivative market to offset the risk of an investment. B) Underlying assets in a future contract can be crude oil, foreign currencies, the BSE Sensex, wheat or bond Future contracts are un organized contracts. C) Future expires on third Thursday of every month in India. D) Stock futures contract size is stipulated at Rs. 1 lac by SEBI.

57) Dividend received by the writer of the Call during the life span of an Option . A. decrease the strike price B. increase the premium value by an equivalent amount C. has to be given to the buyer of the option, only if he eventually exercises the option D. can be pocketed by the writer.

58) Consider a portfolio of two investments viz. A & B. The sum total of volatility of A & B respectively, represented by standard deviation of the two investments, will be equal to the volatility of the portfolio as a whole if. A. A & B have a correlation of 1. B. the portfolio is equally divided between A & B. C. A & B have a correlation of Zero. D. the return on the portfolio is equal to the sum of returns of A and B.

59) Risk free rate of return is 8%, expected market premium is 15% and Beta of security is 0.80. What is the expected rate of return of the security ? A. 13.6% B. 15.00% C. 12.00% D. 20.00%

60) Consider that an investor writes a covered call on XYZ share. Spot price is Rs. 38, Exercise price is Rs. 40 and a 3 month call in XYZ share is traded at Rs. 3. What is the initial cash flow incurred at the time of investments?

A. Rs. 35 B. Rs. 38 C. Rs. 41 D. Rs. 43

61) Sunil has purchased 100 convertible debentures of XYZ on 1/1/2001 at Rs. 500 each. 30% of the value of the debentures in convertible into one share of Rs. 50 each after 6 years. Sunil exercised his option on 1/1/2007 and received 100 shares. Compute the cost of acquisition of these shares. A. Rs. 150 B. Rs. 500 C. Rs. 155 D. Rs. 145

62) The net present value of a series of discounted cash flows is less than zero, one could interpret that : 1. The discounted cash flows are lower than the investment outlay 2. The rate of return is lower than the cost of capital 3. The return on investments is higher than the internal rate of return 4. The internal rate of return was the discount rate used. A. 1,2,3 &4 B. 2 and 3 only C. 1 and 4 only D.1 only.

63) Security A has a standard deviation of 23% and the market has a standard deviation of 18%. The correlation coefficient r between Security A and the market is 0.80. What is the % of the change in Security A can be explained by changes in the market ? A. 80% B. 50% C. 36% D. 64%

64) The Portfolio consists of two securities, X and Y in the ratio of 70 : 30. Given that

i) Standard Deviation of X is 10% ii) Standard Deviation of Y is also 10% and covariance between them is 16%. What is the portfolio risk ? A. 8.04% B. 13.77% C. NIL D. 25%

65) Which of the following statements is/are true regarding strategic and tactical asste allocation ? 1) Strategic asset allocation involves selection of correct asset allocation based on risk tolerance of the client, economic forecasts, and expectations of selected asset classes and rebalancing once or twice per year to keep the portfolio within the parameters of the desired strategic mix. 2) Tactical asset allocation involves evaluating asset classes or industries as to their value and selling undervalued classes and purchasing over valued classes. A. 1 is only true B. 2 only is true C. both 1 & 2 are true D. Neither 1 nor 2 is true.

66) You are evaluating the following table for your customer : Fund A B C Market Average Return (%) 22 14 16 12 Standard Deviation (%) 24 18 17 15 Beta 1.3 0.9 1.1 1

Assume risk free rate is 6%. The rankings based on the Treynor Ratio.(in the order of best to worst) is . A. A,B,C B. A,C,B C. B,A,C

D. C,B,A

67) Returns on a security held for 5 years by Praveen are : First year 7%, second year 3%, third year -9%, fourth year 6 % , fifth year 10%. Find the standard deviation of the security. A. 8.50% B. 7.37% C. 8.00% D. 6.59%

68) The XYZ company paid a dividend of Rs. 2 last week. The dividend for XYZ company is expected tob be 100% greater next year. The growth rate for the following year is expected to be 50%. In the third year and thereafter, the dividend is expected to grow annually at a rate of 8%. If your requirement is a return of 12%, what is the maximum you would pay for the security ? A. Rs. 159.50 B. Rs. 142.70 C. Rs. 137.50 D. Rs. 140.50

69) Which of the following financial transactions/events would affect net worth of your clinet ? (A) Repayment of a loan using fund from a savings account. (B) Purchase of car which is 75% financed with 25% down payment. (C) The Nifty is appreciating, and the client is holding Nifty Indexed Mutual Fund. (D) Interest rate increases and the client holds substantial bond portfolio. A. (C) & (D) B. (B) & (C) C. (A), (C) & (D) D. All of the above.

70) The May futures contract on XYZ Ltd. closed at Rs. 3940 yesterday. It closed today at Rs. 3898.60. The Spot closes at Rs. 3800. Raju has a short position of 3000 in the May futures contracts. He sells 2,000 units of May expiring put options on XYZ with a strike of Rs. 3900 for a premium of Rs. 110 per unit. What is his net obligation to/from the clearing corporation today? A. Pay Rs. 344200 B. Receive Rs. 344200

C. Receive Rs. 640000 D. Pay Rs. 95800

71) Dr.Mishras Stock broker suggested him to write a call on XYZ Pvt. Ltd. at a strike price of Rs. 500 per share. The lot size is 400 shares and premium is Rs. 4 per share. Dr. Mishra wants to know, if he enters this transaction, what maximum profit/loss opportunity is available for him. A. Both profit and loss are unlimited B. Maximum profit is Rs. 1600; Maximum loss is unlimited C. Maximum loss is Rs. 1600; Maximum loss is unlimited D. Maximum profit /loss is limited to Rs. 1600.

72) ABC Ltd.s stock has a current dividend of Rs 1.75 that is growing at 8%. If the stock is currently selling for Rs. 100 and your required rate of return is 10%, will you buy the stock at todays price? A. Yes, because the stock is a very good buy based on a risk-return relationship. B. No, because the stock is overvalued based on the dividend growth model. C. No, because the stock is a bad investment based on a risk-return relationship D. Yes, because the stock is undervalued based on the dividend growth model.

73) A portfolio consists of 3 securities 1, 2 & 3. The proportion of those securities are w1=0.3, w2=0.5, w3=0.2. The Standard Deviation of those securities are SD1=6%, SD2=9%, SD3=10%. The correlation co-efficient among the securities are r12=0.4, r13=0.6, r23=0.7. Calculate the standard deviation of the portfolio returns ? A. 7.13% B.6.58% C. 8.25% D. 7%

74) On 10th March 2008 Arvind had taken an open short position of 10lots of Nifty Futures, with an average price of Rs. 4450. On 10th March 2008, Nifty closed at Rs. 4520. However, he did not square off his position until 11th March 2008 when nifty dipped to na intraday low of Rs. 4395. He squared off his position of 4 lots at Rs. 4495 & remaining 6 lots on an average price of Rs. 4410. On 11th March 2008, Nifty closed at Rs. 4460. The lot size of nifty futures is 50. What profit/loss was booked by Arvind on is entire position? (assume Brokerage and taxes per lot is Rs.50 on each side, while buying as well as selling) A. Profit of Rs. 2000 B. Profit of Rs.3000

C. Loss of Rs. 2000 D. Loss of Rs. 3000

75) Mohan invested Rs. 10000 in XYZ mutual fund on 1/1/2000. He received cash dividends of Rs. 200, Rs. 300, Rs. 200 & Rs. 300 on 31/12/2000, 31/12/2001, 31/12/2002 & 31/12/2003 respectively. He reinvested all the dividends received in the fund. He sold the fund on 1/1/2004. What is the IRR if he sold the fund for Rs. 15000? A. 8.53% B. 8.83% C. 8.00% D. 10.67%