AVINASH DEGREE COLLEGE KUKATPALLY

COURSE : ANALYSIS OF AND INVESTMENT PAPER CODE : BB 507

IN FINANCIAL ASSETS (F)
PROGRAM : BBA COURSE TYPE :

SEMESTER : V FACILITATOR : K Swapna sri

UNIT – I : INTRODUCTION :

Choose the correct answers :

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25

A) Multiple choice Questions :

1. The approach which completely depends on emotions or mood of the investor rather than the
reason behind investment in stock is

a) Fundamental approach b) Eclectic approach c) Psychological approach d)Academic approach

2. Systematic risk is also referred as

a)Market risk b)Non-diversifiable c)both (a) and (b) d)Specific risk

3. An extra return over the risk free rate expected by investors to repay them for holding an asset
with a certain degree of change is

a)risk aversion b)risk premium c)risk return trade off d)none of the above

4. Which form of EMH is also known as random walk model

a)weak form b)semistrong form c)strong form d)hard form

5. Anomalies of efficient market hypothesis are

a) Weekend effect b)January effect c)Small firm effect d)All of the above

6. The fixed income securities available in India are

a)Bank deposits b)Company deposits c)Small savings schemes d)All of the above
7. The relationship between bond price and yield which measures the sensitivity between them is

a) bond duration b)bond convexity c)bond indenture d)bond immunization

8. Agency cost consists of

a)Binding b)Monitoring c)Opportunity and structure cost d)All the above

9. The job of a finance manager is confined to

a)Raising funds b)Management of cash c)Raising of funds and their effective utilization d)None

10. Which is not the function of finance manager

a)Acquisition of funds b) Accounting of funds c)Investment of funds d)Disposal of surplus

11. After formulating the investment policy, securities are scrutinized through

a)Market analysis b)Industry analysis c)Company analysis d)All of the above

12. The industries which are more volatile and do well when economy prospers and during
depression they suffer a setback are considered as

a)Growth b)Cyclical c)Defence d)Vertical

13. Taking high risk not only for high return but also for thrill and excitement is

a)Investment b)Gambling c)Speculation d)None of the above

14. The changes that are brought in the returns of securities due to variability in the interest rates is

a)Interest rate and risk b)Market risk c)Inflation risk d)Business risk

15. CIMM is a database introduced by the well-known research organisation stands for

a)Center for monitoring the Indian economy b)Center for foreign economy

c)Center for globalizing d)Center for privatizing

16. The value of bonds depends upon the following factors

a)coupon rate b)Expected yield to maturity c)both a and b d)yield to call

17. Financial decisions involve

a) Investment, financing and dividend decisions b) Investment, financing and sales decisions

c) Investment, financing and cash decisions d) None

18. Financial management process deals with

a)Investment b)Financing decisions c)Both a and b d)None of the above

19. Finance function comprises

a)Safe custody of funds only b)Expenditure of funds only

c)Procurement of finance only d)Procurement & effective use of funds

20. A short term instrument of raising funds by corporate is

a)commercial paper b)certificate of deposit c)Debentures d)Bonds

21. The main of the investment is

a)Additional income b) growth c) both (a) and (b) d) none

22. The following are the types of investments

a) Economic investments b) Financial investments c)both (a) and (b) d) none

23. The following are the characteristics of investments

a) Financial assets b) Realistic return c) Reasonable return d) both(b) and (c)

24. The act of conducting a financial transaction that has substantial risk is known as

a) Speculation b) Differentiation c) Analysis d)none

25. The following represents real ownership of a company

a)Equity shares b) Preference shares c) Debenture d)none of the above

B) FILL IN THE BLANKS :

1. _____ in finance and accounting , means stated value or face value.

2. _____ is often associated with the dispersion in the likely outcomes.

3. The main objective of investment is to get the realistic ____.

4. __________ means the investing of money.

5.__________ are cash or transactional instruments that are readily convertible into cash.

6._______is an investment position intended to offset potential losses or gains that may be income
by a companion investment.

7. ___________ is the act of conducting a financial transaction that has substantial risk of losing all
values but with the expectation of a significant gain.

8. __________ means “sacrificing the present value of money for future benefits”.

9. __________ is the process of simultaneous buying and selling of an assert from different
platforms exchanges or locations to cash in on the price difference.
10. A ___________ is the minimum difference a person requires to be willing to take an uncertain
but between the expected value of the bet and certain value that he is indifferent to.

11. The _________of the bond can be thought of as principal amount on which interest is paid.

12. _________ is a long term investment.

13. ____________ is the process of determining the bond values.

14. ____________ is a cost incurred by market forces.

15. ________________ is a contract between bond holders and bond issuers which is certain right
and regulations to both the parties.

16. Bond duration measures _____________ and ___________

17. ___________ holders are merely creditors not the owners of the company.

18.The percentage return that the investor will receive is __________

19. An effective tool in assigning accurate values to the mispriced bonds is ___________

20. Investment objective is high _____ and high _________

C) CONCEPT BASED QUESTIONS :

1. Investment

2. Primary objectives of investment

3. Secondary objectives of investment

4. Characteristics of investment

5. Reasons for investment

6. Real assets

7. Financial assets

8. Classification of financial assets

9. Concept of equities

10. Fixed income securities

11. Concept of derivatives

12. Speculation

13. Speculators

14. Difference between investors and speculators

15. Types of speculators

16. Bullish speculators

17. Bearish speculators

18. Hedging

19. Types of hedging

20. Forwards

21. Futures

22. Money market

23. Hedging through structures

24. Hedging through options

25. Arbitrage

Key to MCQ’S :

1 2 3 4 5 6 7 8 9 10
C C B A B D B D B B
11 12 13 14 15 16 17 18 19 20
D B C A A C A B D A
21 22 23 24 25
C C D A A

Explanation for MCQ’s :

1. Generally investors invest in a company with an intention on earning returns from the
investments, if an investor finds a profitable return in a company he generally tend to invest in it.
This is called psychological approach of investment.

2. Systematic risk is also known as market risk and non-diversifiable risk. This is the risk which we
cannot divert ,which means no human effort will reduce this risk. That’s why it is known as non-
diversifiable.

3. Risk premium is nothing but the return which an investor generally expects from his investment
over the risk rerate which is given by banks , government companies.

4. Random walk model is a well established model in efficient market hypothesis. In this model it is
generally assumed that each step is independent of its prior step and moves in a step form in
assessing of time series.
5. One of the anomalies of efficient market hypothesis is January effect. It is because the
investments which pay less returns will tend to sold in the month of January of last quarter.

6. There are n number of fixed income securities which are available in the market (i.e,) prior
periodical payment of returns from the investment. Some are bank deposits , company deposits,
small saving schemes.

7. Generally the bond price is the price which is available for the investor to make an investment in
the bond and yield is nothing but the return which an investor can expect from the bond. The
relationship between bond price and yield will be expressed by a term known as bond convexity.

8. Agency cost is nothing but the cost of carrying of the investments .It includes binding , monitoring,
opportunity and structure cost.

9. Management of cash is the primary function of the finance manager. He should assess the
maximum returns where investments can be done.

10. Acquisition of funds ,Investment of funds , Disposal of surplus are not the job / functions of
finance manager. The sole function of finance manager is to assess the maximum returns for the
investments.

11. Market analysis ,Industry analysis , Company analysis is the long cycle where the market in
which the company runs , Industry in which the company runs and the natures of company are
analysed during the investment policy.

12. Generally in financial terms , the industries which are more volatile and do well , then economy
prospers and it depress when the set back has hit the economy are known as cyclic natured
industries.

13. Speculation is the term used for taking high risk on expectation basis for high returns , thrill and
excitement.

14. In general the returns of the securities tends to variable with change in interest rate in the
market scenarios.These terms are known as interest rates and risk.

15. Centre for monitoring the Indian economy, which analyses the GDP of the country and the
economy of the nation is commonly known as CIMM.

16.The value of bonds generally depends on two factors – Coupon rate and expected yield to
maturity. Coupon rate is the rate at which the bond yields return. Expected yield to maturity is
during the maturity period the amount of returns received by the investor from the bond.

17. Investment financing and dividend decisions majorly involve in financial decisions.

18. Financial management process deals with financing decisions. Some of them are procurement of
funds , investment in the best possible return funds considering dividend policies.

19. Procurement and efficient use of funds is the primary function of finance department. During
procurement the most economical interest rate should be assessed and during investment most
effective interest return rate should be considered.
20. A short term security instrument of raising funds by corporate is commercial paper. These are
used for general temporary needs of a company.

21. Since an individual invests in a company with an objective of earning returns or growth in its
value . These will be the main objectives of the investment.

22. Generally investments are of two types- 1) economic investments 2) financial investments.
Economic investments will be made with an objective of increase in value ,whereas financial
investments are for earning returns .

23. There are three types of characteristics for investments -1) Realistic return 2) Reasonable risk
3)Marketability.

24. Speculation is an act of conducting a financial transaction which has the risk of losing all the
value or earning some returns.

25. Equity shares represent the true ownership of the company because, they have all the rights
which can be claimed on the value of the assets available in the company, they also have voting
rights in the ccompany.

Key to fill in the blanks :

1. Par value

2. Risk

3. Returns

4. Investment

5. Financial assets

6. Hedging

7. Speculation

8. Investment

9. Arbitrage

10. Risk premium

11. Face value

12. Arbitrage

13. Bond valuation

14. Systematic risk

15. Bond indenture

16. Time structure, interest rate

17. Debentures

18. Bond yield

19. Bond swaps

20. Risk, returns

Key to concept based questions :

1. It is the commitment of current financial resources in order to achieve higher gains in the future.

2. Safety, income, growth of capital.

3. Tax minimisation, marketability can be regarded as secondary objectives of the investment.

4. Return, risk, safety, liquidity, marketability can be regarded as characteristics of investment.

5. Longer life expectancy, increasingly rates of taxation, interest rates, inflations, income.

6. Real assets are physical assets that have value due to their substance and properties.

7. Financial assets are tangible liquid assets that gets its value from contractual claims. Eg: stocks,
cash, bonds etc.

8. Equities, fixed income securities, derivatives are some of the classifications of financial assets.

9. Equities are shareholding rights to a business and they are issued either as common shares or
preferred stock. In general, they carry voting rights.

10. These are instruments of borrowing that a fixed rate of interest over specified durations. Some
will be issued by public institutions while some will be by private institution.

11. Derivatives are securities such as futures and options whose valuations are attached to other
assets.

12. It is set of conducting a financial transaction. It is an act of conducting a financial transaction that
has substantial risk of losing its value but with expectations of significant gains.

13. Speculators are the people who engage in speculative investments. In other words, a speculator
is a person who buys assets, financial instruments with the hope of selling them at profit on future
date.

14. Speculation is a separate activity from making an investment. Investing involves purchase of
assets with intend of holding them longer term while, speculation involves attempting to capitalise
on market inefficiencies.

15. There are two types of speculators, they are Bullish speculator and Bearish speculator
16. A bullish speculator expects prices of securities to rise, which means he expects to make profit
when the market is in increasing trend.

17. Bearish speculator is one who expects prices of securities will fall in the future which means he
expects to make profit when the market trend is decreasing.

18. It is an investment position intended to offset potential losses or gains that might occurred by
companion investment.

19. Hedging can be classified as

 Forward hedging
 Futures hedging
 Money markets
 Hedging strategies

20. Forwards is a non-standardised contract to buy or sell an asset between two independent
parties at an agreed price at a specific date.

21. Futures are a standardised contract to buy or sell an asset between two independent parties at
agreed price standardised quantity at a specific date.

22. It is one of the major components of financial markets where short term lending, borrowing,
buying, selling are done with maturity of one year or less.

23. This can be done by investing a portion of portfolio in debt and other by derivatives. It is one
form of hedging strategies.

24. This is a hedging strategy where a call option and a put option are vice versa will be used to
save the investments.

25. It is the process of simultaneous buying and selling of an asset from different markets with an
intention of making profit by selling in one market and purchasing in the other.

UNIT-II : VALUATION OF FIXED INCOME SECURITIES :

Choose the correct answers :

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25
Multiple choice questions :

1. The objective of fixed income securities

a)generate fixed income b) generate value c)none d) both (a) and (b)

2. Interest rate fluctuation cause change to

a)bonds b) Equity shares c) preference shares d) none

3. This is the safest mode of investment

a)Equity shares b) preference shares c) bank deposit d) none

4.This value of bank deposits will be covered by deposit insurance scheme

a) 2,00,000 b) 1,00,000 c) 8,00,000 d) 10,00,000

5. This rate of discount is applied on interest rate when fixed deposit is pre matured

a)3% b)1% c)2% d)4%

6. These securities cannot be tradable in stock market

a) Equity shares b) bonds c) bank deposits d) none

7. The deposits made with manufacturing companies or any companies is known as

a) company deposits b) bank deposits c) both (a) and (b) d) none

8. These deposits will be governed by RBI

a) Bank deposits b) company deposits c) both (a) and (b) d) none

9. These deposits are not governed by RBI

a) Bank deposits b) company deposits c) both (a) and (b) d) none

10. The investment in these securities gets doubled in 5 to 6 years in general

a)small savings scheme b) medium savings scheme c) fixed deposits d) none

11. Bonds have same features as

a) Equity shares b) preference shares c) debentures d) none

12. The par value of the bond indicate _________ of the bond .

a) face value b) market value c) both (a) and (b) d) none

13.The specific rate of interest on a bonds is known as

A) interest rate b) premium c) coupon rate d) all

14. In India , the long term debt instrument issued by government is known as

a) Equity shares b) preference shares c) bonds d) none

15. In bonds the difference between ______ is gain to the investor

a) face value and redemption value b) face value and purchase value
c) both (a) and (b) d) none

16. The bonds that sell at discount and repaid at face value is known as

a) normal bonds b) revalued bonds c) zero coupon bonds d) none

17. These will be sold at huge discounts compared with zero coupon bonds

a) deep discount bonds b) normal bonds c) both (a) and (b) d) none

18. Deep discount bond maturity generally ranges from

a) 1 to 2 years b) 2 to 5 years c) 3 to 25 years d) 25 years or more

19. This bank issued first deep discount bonds

a) ICICI b) Vijaya bank c) IDBI bank d) SBI bank

20. The interest paid by bonds is known as

a) bond yield b) bond value c) bond premium d) bond discount

21. Yield to maturity is generally calculated at

a) end of the maturity b) middle of the maturity c) beginning of the maturity d) none

22. Holding period rate of return is also known as

a) one time period return b) yield to maturity c) bond yield d) none

23. The calculation of yield to call is based on

a) coupon rate b) interest rate c) value d) all

24. This methods is used to calculate the duration of the bond :

a) Pascal methods b) Mac Kaley method c) pasta’s method d) none

25. Duration of the bond actually measures

a) sensitivity b) value c) interest rate d) all

B) Fill in the blanks :

1. The fixed income securities available in India are ______________

2. A short term instrument of raising funds by corporate is __________

3. The value of bonds depends upon __________and _________________

4. The relationship between bond price and yield which measures the sensitivity between them is
__________.

5. Preferred habitat theory , segmentated market , liquidated preference theory are _____

6. Bond portfolio management strategies are ________ and __________

7. The swap to earn more returns by selecting long term bonds is ___________

8. The bond is said to be fairly priced when _________

9. In valuation of optionally convertible debentures, debentures holders exclusively posses the

option of ______________ and ________________

10. The model developed by Macaulay’s duration is also known as_____________

11. Securities which earns interest or dividend at fixed rate for a stipulated period of time are _____

12. ____________ is a contract between bondholders and bond issuers which is certain right and
regulations to both the parties.

13. The percentage return that the investor will receive is __________

14. ______________ is the process of determining the bond values.

15. Bond duration measures ___________ and ______________

16. ______________ is a technique that makes the bond holder relatively certain about the
promised stream of the cash flows.

17. An effective tool in assigning accurate values to the mispriced bonds is _________

18. Indexing strategy possess two well known bond indices namely ____________ and
____________

19. _________________ is a process of holding a well diversified portfolio for a long term with the
buy and hold approach.

20. Liquidity preference theory = ___________________

c) Concept based questions.

1. Bond value.

2. Bond duration
3. Bond yield

4. Bond swaps.

5. Commercial paper.

6. Bond convexity.

7. Passive management.

8. Immunization on bonds.

9. Liquidity preference theory

10. Bond indenture.

11. Face value of bonds

12. Present value

13. Redemption value

14. Equity shares.

15. Preference shares

16. Bank deposits

17. Company deposits

18. Par value

19. Coupon rate

20. Debentures

21. Interest rate

22. Small saving scheme

23. YTM

24. AYTM

25. Sensitivity of bonds.

Key to MCQ’S :
1 2 3 4 5 6 7 8 9 10

A A C B B C A A B A

11 12 13 14 15 16 17 18 19 20

C A C C B C A C C A

21 22 23 24 25

A A A B A

Explanation to MCQ’S :

1. Fixed income securities are the securities in which investors gets fixed income throughout its life
periods. Eg. Bonds. The main objective is earning fixed income from this investments.

2. Generally interest rate causes fluctuation to the prices of bonds. Depending on the variability of
the bond, they have inverse relationship among them.

3. Bank deposits are risk free because they will be governed by government through Banking
regulations act . Therefore investor has minimal risk with bank deposits.

4. An individual with a bank deposit of 1,00,000 gets inbuilt by banking insurance deposit scheme.
Therefore his investment of 1,00,000 is safe with bank.

5. When a fixed deposit is pre matured by investor depending on various reasons , a discount rate of
1% will be applied on interest rate.

6. The bank deposits are deposits with bank . They cannot be traded in stock market like equity
shares and bonds which means they are fixed for a fixed period of time.

7. Unlike bank deposits an investor has the option to deposit his investment with companies , these
companies will pay higher returns compared with bank deposits.

8. Bank deposits will be governed by RBI through Banking regulations act . Therefore compared with
company deposits these are more secured.

9. Company deposits does not have any guarantee to the investors because, RBI does not govern
these deposits through banking act . Therefore these deposits pay higher returns compared with
bank deposits.

10. Small savings scheme are highly useful for middle class group of population because, their
investments gets double in general of 5 to 6 years .

11. Debentures and bonds share common feature among them . They both represent liabilities for
the organisations , their payments are known as interests.
12. In general the face value of the bond/ debenture is also known as par value of the bond/
debenture on which the company pays interest.

13. The interest rate will be paid on the face value of the bond. This interest rate in financial
language is also known as coupon rate of the bond.

14. The bonds represent debt instrument issued by government whether central or state
governments or organisations owned by them as long term debt instruments.

15. Sometimes the bonds may be traded at lesser rate compared with par value, the difference
between purchase value and face value is gain to the investor.

16. Zero coupon bonds are bonds which are traded at discount value compared face value and will
be redeemed on face value at maturity.

17. Deep discount bonds are having the same feature as zero coupon bonds but, they will be traded
at huge discounts compared with zero coupon bonds.

18. Deep discount bonds generally have a maturity period of minimum of 3 years to maximum of 25
years or more.

19. IDBI bank first issued deep discount bonds in the year 1992 with a maturity period of 15 years.

20. Yield is nothing but the returns which an investor is getting from investments in the bonds.They
are called bond yield.

21. Generally yield to maturity or YTM will be calculated by investors at the end of the maturity of
the bond in which investment is made.

22. Holding period return is generally calculated by the investor during his holding of the investment.
This is also known as one period return by the investors.

23. Yield to call is measured at the time of the call made by organisation issuing the bonds. It
generally depends on the coupon rate of the bonds.

24. Mac Kaley’s method is the generally accepted method for calculating the duration of bond taking
the time series into consideration.

25.Generally, the duration of the bonds is calculated to measure its sensitivity with the price interest
rate available in the market.

Key to fill in the blanks :

1. Bank deposits, company deposits, small savings schemes

2. Commercial paper

3. Coupon rate, unexpected yield to maturity

4. Bond convexity

5. Termed structure theories

6. Active bond management, passive bond management

7. Pure yield pickup swap

8. YTM= AYTM

9. Continue as debenture holder , choosing for convention

10. Continuous model

11. Fixed income securities

12. Bond indenture

13. Bond yield

14. Bond valuation

15. Time structure, Interest rate risk of the bond

16. Immunization

17. Bond swaps

18. Shearson Lehman index, Salomon brothers index

19. Passive management

20. Expectation theory+ Liquidity risk premiums

Key to concept based questions :

1. The value of bond which is calculated by the investor after taking into consideration the dividend
flows or the interest flows from respective bonds is known as bond valuation.

2. Bond duration is the time period which the investor holds the bond is known as bond duration.
There are 2 types of dimensions in calculating- 1) Macaulay’s duration 2) Modified duration

3. The return on respective bonds which investor can expect by investing in such a bond is known as
bond yield. It is also known as the return from the bond.

4. The swapping of different kinds of bonds based on the various factors like interest rate, inflation
rate etc. is known as bond swaps.

5. The tool used by the investor for making an investment is known as commercial paper.it is one of
the securities available for the investors to invest.

6. Bond convexity is a measure of non-linear relationship of bond prices to changes in interest rates,
the second derivative of price of the bond with respect to interest rate.
7. Passive management is an investment strategy by the manager that tracks a market weighted
index of the portfolio.it is most common on the equity market.

8. It is an investment strategy used to minimise the interest rate risk of the bond investment by
adjusting portfolio duration to match investor’s expectation.

9. It is a macro economic theory where the demand for money considered as liquidity. The concept
was first developed by John Keynes in his book “ General theory of employment”.

10. It is the contract associated with a bond. The terms of bond indenture includes a description of
the bond features, restrictions placed, actions that will be triggered if issuer fails to make timely
payments.

11. The price of the bond which the respective company or the government authority quotes as its
value or par value is known as face value of the bonds. The interest rate will be calculated on this
value.

12. The future interest payment of the bonds paid to the investor is converted into present value of
future cash flows using some discount factor.

13. The price of the bond at which it is redeemed after the expiry of the duration of the bond is
known as redemption period.

14. Equity shares are commonly used tools or securities for the investor to invest in a certain
company. It has voting rights compared with preference shares.

15. These preference shares are also known as outsiders for the company. They will receive timely
payments by the company known as dividends.

16. Bank deposits are the method of saving where investors invests his savings in a deposit by the
bank in which he receives some timely payments from the bank known as interest rate.

17. Company deposits holds the same characteristics as bank deposits but, comparatively these
company deposits have some risk associated with them compared with bank deposits.

18. Par value is nothing but the rate at which the bond or security is quoted by the company. In most
cases, it is the face value.

19. Coupon rate is nothing but the rate of interest which an investor is receiving by investing in such
bonds.

20. Debentures are some sort of liability instruments to the company. For these debenture holders
there will be a regular payment of interest on its face value by the company.

21. Interest rate is nothing but the rate of payment made by the company to the investor for
investing in such a company. Generally, interest is paid on bonds or debentures.

22. Small savings schemes are the schemes available for low income group. They can invest in small
savings schemes offered by the bank, their savings on which they receive some sort of interest.
23. Yield to maturity is the rate at which the present value of future cash flows by the bonds is equal
to current value of the bond.

24. Approximate yield to maturity is an extension of yield to maturity. In this method, a respective or
fixed formula is used compared with Yield to maturity.

25. The sensitivity of bonds is nothing but the difference of change the bond receives or the value of
the bond receives in change with the interest rate of the bond.

UNIT-III VALUATION OF COMMON STOCK :

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25

A) Multiple choice questions :

1. Stock represents __________ of a company.

a) ownership b)Debenture c) preference shares d) none

2. Stock represents a claim in ____________

a) ownership and assets of the company b) liabilities

c) both a and b d) none

3. Acquisition of more stock of a company gives __________

a) increase in ownership b) decrease in ownership c) no ownership d) none

4. Holding of a company’s share implies ______

a) owner b) creditor c) debtor d) none

5. Share holding in a company represents __________ of a company .

a) voting rights b) fundamental rights c) civil rights d) none

6. Common stock is also known as _______

a) preference shares b) debentures c) equities d) none

7. preferred stock is also known as ______

a) equity shares b) creditors c) preference shares d) all the above

8. These carry voting rights of a company ___________

a) preference stock b) common stock c) both a and b d) none

9. These does not carry any voting rights of the company _________

a) preferred stock b) common stock c) debentures d) none

10. This represents fixed dividends of the company __________

a) equity shares b) preference shares c) debentures d) bonds

11. This represents variable income securities of the company _________

a) equity shares b) preference shares c) debentures d) bonds

12. Which type of shareholders has right to residual income

a) debentures b) preference shareholders c) equity shareholders d) none

13. These shareholders can alert their board of directors

a) preference shares b) debenture holders c) equity shareholders d)none

14. Common stock value is __________ of future cash flows.

a)present value b) future value c) both a and b d) none

15. The main objective of equity investors is

a) valuation of common stock b) valuation of preferred stock

c) valuation of debentures d) all

16. Equity shareholders while investigating looks for

a) current dividends b) rights c) future capital gain d) all the above

17. The important determinant of both dividends and market value is

a) tax payment b)interest rate payments c) earnings d)none

18. The retained earnings of a company represents ___________

a) decline b) rights c) growth d) none

19. The bond investors and equity investors use this model while investment.

a) future value theory b) price earning theory c) present value theory d) none

20. The sum of all future dividends of company id basis for

a) dividend discount model b) present value model

c) price earning model d) all the above

21. This model is based on discounting of all expected future cash flows

a) price earning model b) dividend discount model

c) intrinsic value model d) none

22. Price earning model represents the relationship between

a) market price of the share and earning per share

b) preference shares and equity shares

c) both a and b

d) none

23. This model is developed for the price fixation of risky securities

a) FACP model b) DBMS model c) CAPM model d) none

24. Purchasing power risk is also known as

a) inflation risk b) deflation risk c) price barite risk d) none

25. No personal income taxes is an assumption for

a) FACP b) DBMS model c) CAPM model d) none

B) Fill in the blanks :

1. The value of a $ 1000 face value bond with an 8% coupon rate when your required rate of return
is less than its _____________

2. If the intrinsic value of a stock is greater than its market value,the reasonable conclusion is
___________

3. When the market’s required rate for a particular bond is much less than its coupon rate, the bond
is selling at a _________

4. If a bond sells a high premium, then _________________

5. Po relationship hold true Po represents the __________ and YTM is the bond’s
_____________

6. Interest rates and bond prices move in the __________

7. In the formula Ke= ( D1/ Po)+g , g represents the ____________________

8. In the United States , most bonds pay interest ____a year , while many European bonds pay
interest ______ a year.

9. The expected rate of return on a bond if bought at its current market price and held to
maturity________________

10. The type of risk avoidable through proper diversion is________________

11. Preference shareholders have preference in payment of______________ and_________

securities.

12. Ploughing bark of profits is known as ____________

13. Refined earnings provide a cushion to absorb the shocks of _________

14. The government companies also accept ___________

15. The cost of funds raised through public deposits has been less than the ___________of bank
advances.

16. ______________of interest on public deposits is restricted to 15% per annum.

17. Fixed capital is also known as ___________

18._____________depends upon future estimations .

19. ______________ is more dangerous than under capitalization.

20. The ____________ is the minimum rate of return expected by investors.

C) Concept based questions :

1. Market risk.

2. Dividend discount model.

3. Current dividends.

4. CAPM model.

5. Preferred stock.

6. Common stock.
7. Valuation of common stock.

8. Stock.

9. Features of common stock.

10. Difference between common stock, preferred stock.

11. Purchasing power risk.

12. Capital market line.

13. Security market line

14. Assumptions of CAPM model.

15. CAPM model.

16. Dividend discount model.

17. valuation of common stock and its formula

18. Various type of stocks available in the stock market.

19. Time value of money.

20. Inflation risk.

21. Formula and usage of PE ratio

22. Assumptions of PE ratio

23. Shareholders right son common stock

24. The focus of fundamental analysis

25. Relying factors of technical analysis

Key to MCQ’S :

1 2 3 4 5 6 7 8 9 10

A A A A A C C B A B

11 12 13 14 15 16 17 18 19 20

A C C A A D C C C A

21 22 23 24 25

C A C A C
Explanation to MCQ’S :

1. Since stock is nothing but shares of a company , a share in a company always represents
ownership of such individual in a company. It can be either preference shares or equity shares.
Share is nothing but securities of the company.

2. Since ,stock represents ownership of a company and individual has a right to claim earnings of the
company and if he has a claim on assets of the company, the earnings of the company will be
distributed to individuals as dividends or interest on returns.

3. Since, acquisition of more shares of a company is nothing but acquiring the ownership in a greater
value of the company, it always represents increase in the value of the shares of the company by the
individuals, that means his shares in the value of the company obviously increases.

4. Since ,acquisition of shares of a company is nothing but buying some stocks of such company, it
represents ownership of the company. Creditors and debtors will be considered as working stock of
the company, since they represent temporary stock of the company.

5. An individual having invested in the shares of the company acquires ownership on each and every
part of the company as per his shares holding. Because of this share holding he also acquires voting
rights in the organisation or operations of the company.

6. Since in general when a trader or general public talks about the shares being traded in the stock
exchange , they are generally referring to equity shares of the company. Therefore , in normal
business language or financial language these equity shares which is representing some sort of or
some degree of ownership in a company is also known as common stock.

7. Generally the preference shares will have less degree of ownership compared to equity shares.
Therefore, company should apply many rules of companies act when issuing preference shares .
Therefore , they are known as preference shares.

8. Since , equity shares is also known as common stock, the common stock generally carries voting
rights on the operation of the company whereas , preference shares does not carry any voting rights.

9. Since , equity shares is also known as common stock, the common stock generally carries voting
rights on the operation of the company whereas , preference shares does not carry any voting rights.

10. Generally , equity shares has voting rights whereas , preference shares does not carry any voting
right but equity shares in comparison with preference shares does not have any fixed income
because they represent the real owners of the company.

11. Since equity shares compared with preference shares has voting rights but it has various income
depending on the profits of the company after the payments of all the debentures , preference
shares, dividends etc.. Therefore this income is variable.
12. Residual income is nothing but the left over income after distribution of necessary payment
obligations to preference shareholders and bond holders . This residual income is the leftover profits
which are available to equity shareholders.

13. Equity shareholders are the real owners of the company compared with preference
shareholders. They have the right to vote, they have the right on the residual income . Therfore, they
can participate in the board meetings and has right to choose their board of directors.

14. The present value of future cash flows is nothing but the discounting of incomes that will be
earned by the company in the future based on the assumptions of the company are based on the
future prospects . Therefore , their main objective will be the valuation of common stock compared
with debentures and preference shares.

15. The common stock is also known as equity shares. The equity shareholders always look for the
future prospects or future growth of the company. Therefore , their main objective will be the
valuation of common stock compared with debentures and preference shares.

16. Since equity share holders has no legal claim on fixed dividends or capital distribution while
investing they always look for current dividend history , future growth of the company( capital
gains), the rights of the equity shareholders.

17. Earnings are the major source of income for any company. Depending upon the earnings of the
dividends, payment ratios and the market values of the company will be majorly dependent.
Therefore , these pay major roles.

18. The retained earnings of company after distribution of fixed commitments (interest on bonds ,
bank loan interest ). The retained earnings will be saved by the company for future investments of
the company. Therefore , they represent growth rate of the company.

19. The present value theory mainly depends on the discounting of future cash flows of the company
to the current market value.Therefore , bond holders and equity holders while investing use this
theory.

20. Dividend discount model is the model where all the future dividends flow into the company will
be discounted to the current market value using appropriate discount rate. This is the basis for
dividend discount model.

21. One of the major valuation model of equity shares is intrinsic value model where all the future
expected cash flows of the company will be discounted to the present value at a appropriate present
rate.

22. The price earning model explains the relationship between the current market value of the
shares based on the earnings of the company. Therefore, the formula is Price of the share / Earnings
of the share.

23. CAPM model which is also known as Capital asset pricing model takes beta of the securities into

Consideration. The beta represents the risk of the securities. This model was exclusively developed
for valuation of risky securities.
24. The purchasing power represents power of the buyer to purchase the essential goods or
products in the market at current prices. Therefore, the purchasing power represents the inflation
risk of the society.

25. One of the major assumptions of CAPM model is the individual investor who has invested in the
company has no liability of personal income taxes which means company pays returns after
payment of taxes by the company itself.

Key to fill in the blanks :

1. Face value percent

2. Market is under valuing the stock

3. Premium

4. Po> par and YTM < the coupon rate

5. Price of a bond , yield to maturity

6. Opposite direction

7. Expected price appreciation yield from a common stock

8. Twice, once

9. Yield to maturity

10. Unsystematic risk

11. Dividend, repayment of capital

12. Refined emotions

13. Economy

14. Public deposits

15. Minimum rate

16. Maximum rate

17. Block capital

18. Financial planning

19. Over capitalization

20. Cost of capital

Key to concept based questions :

1. Market risk is nothing but the risk, which the various factors present in the market accrue to the
shares. Eg. Inflation risk, political risk etc..

2. Dividend discount model is nothing but the discounting of future dividends into present value.

3. The dividends or returns of the investor on the current market price of the share is known as
current dividends.

4. Capital Asset pricing model is nothing but the returns or expected returns of the investor will be
ascertained.

5. Preferred stock is nothing but the preference shares available in the market of different
companies are known as preferred stock. It is preferred compared with common stock.

6. Common stock is nothing but equity shares of the company. It represents ownership of the
company. It has voting rights.

7. The common stock can be valued in different ways. 1) Dividend discount model 2) price earning
model 3) market capitalisation model

8. Stock is nothing but securities of the company. There are n number of securities available in the
market. The two majorly used stock are preferred stock and common stock.

9. Common stock is nothing but equity shares of the company. It represents ownership of the
company. It has voting rights compared with preferred stock .

10. Preferred stock is nothing but preference shares of the company whereas common stock
represents equity shares of the company. Preferred stock represents dividends ( obligatory
payments) whereas common stock receives profits of the company.

11. The inflation factor of the nation which affects the shares of the nation is known as purchasing
power risk.

12. It is the tangent line drawn from the point of the risk free asset to the feasible reason of the risky
asset.

13. It is the line drawn on the chart that serves as a graphical representation of Capital Asset Pricing
Model, which shows different levels of systematic and unsystematic risk.

14. 1) Investors can sell any number of shares without any limits

2) there is perfect competition and no single investor can influence prices.

15. CAPM is nothing but capital asset pricing model. In this method, the investor can ascertain the
expected return from the portfolio.

16. Dividend discount model is nothing but the discounting of future dividends from a respective
share into the present value using some discount rates.
17. Valuation of common stock is nothing but the valuation of company’s worth in the market. It is
obtained from various methods. One of the methods is market capitalisation method (i.e,)market
price of shares in the company X number of shares.

18. There are n number of securities available in the market. They are preference shares, equity
shares, bonds, debentures, commercial papers, treasury bonds etc..

19. The value of money changes with time. A rupee received after one year is different from a rupee
received today. This is the concept of time value of money.

20. Inflation risk is nothing but the risk which affects the share price of the securities when the prices
of normal commodities in the country increases.

21. PE ratio is price earning ratio. It is used in the calculation of value of equity shares of the
company. PE ratio = market price of the shares / earnings per share.

22. The following are the assumptions of PE ratio :

1) earnings are stable

2) growth rate expected to continue in future period.

23. Shareholders are more conceptual than technical or factual. Their most common source is in the
statutory or case laws of the jurisdiction in which company was formed. They have voting rights on
certain matters.

24. Fundamental analysis mainly focus on some factors. Some of the factors are – experience of
companies management, overall outlook for industry sector, market share.

25. The technical analysis relies on the following factors- 1) volume 2) advance ratio (or) decline ratio
3) support and resistance.

UNIT- IV BASIC PORTFOLIO THEORY :

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25
A) Choose the correct answer :

1. A portfolio is a collection of

a) securities b) shares c) debentures d) none

2. The return of portfolio depends on

a) returns of all securities b) risk of all securities c) both a and b d) none of the above

3. Traditional portfolio emphasizes on

a) risk bearing b)return taking c) none of the above d) both a and b

4. According to the traditional portfolio theory, young adult would be advised

a) taking dynamic securities b) taking established securities c)both a and b d) none

5. The managing of all the securities of an individual

a) risk management b) financial management c) portfolio management d) none

6. The art of managing individual assets is known as

a) financial management b) portfolio management c) risk management d) return management

7. Portfolio management presents the best ____ to the individuals.

a) investment plan b) destructive plan c) both a and b d) none

8. Portfolio management considers the following

a) age b) budget c)risking capacity d) all the above

9. Portfolio management minimizes

a) risk b) return c) both a and b d)none

10. The unique personalised investment plan is possible in

a) financial management b) market management c)portfolio management d) all the above

11. Among the following the different types of portfolio management are

a) active b) passive c) both a and b d) none

12. The following are the other methods of portfolio management

a) discretionary b) non discretionary c) both a and b d) none

13. In which method portfolio manager actively participate in buying and selling

a) active b) passive c) discretionary d) non discretionary

14. In this method portfolio manager deals with fixed design

a) active method b) passive method c) both a and b d) none

15. Under this method the investor appoints a portfolio manager to look after all his assets

a) discretionary b) non discretionary c) active d) passive

16. Under this method the portfolio manager advices the clients of what is good and bad.

a) discretionary b) non discretionary c) active d) passive

17. These are created on the constraints of risk and returns

a) Modern portfolio theory b) traditional portfolio theory c) both a and b d) none

18. Modern portfolio theory was proposed by

a) Markowitz b) sharpe c)both a and b d) none

19. Traditional theory of portfolio analysis

a) individual securities b) combination of securities c) debentures d) equity shares

20. The modern portfolio theory emphasizes on

a) combination of securities b) individual securities c) equity shares d) none

21. The probability of loss is the essence of

a) risk b) returns c) shares d) securities

22. Risk of portfolio and risk of individual securities are

a) same b) different c)independent d) none

23. Risk of portfolio is reflected in variability of

a) returns b) management c) risk d)none

24. Under modern portfolio theory diversification is

a) limited b) unlimited c) none of a and b d) all

25. The following is the assumption of Markowitz theory

a) investor is knowledgeable b) investor is not knowledgeable

c) no relevance of investors d) none

B) Fill in the blanks :

1. A statistical measure of the degree to which two variable move together is _________

2. An “Aggressive” common stock would have a “Beta” ____________

3. A line that describes the relationship between an individual security’s returns and returns on the
market portfolio is called ________________

4. According to the capital-asset pricing model (CAPM) , a security’s expected return is equal to the
risk-free rate plus a premium based on the _____________________

5. The risk-free security has a beta equal to ____, while the market portfolio’s beta is equal to
_____________

6. Carrie has a “ certainty equivalent” to a risky gamble’s expected value that is less than the
gamble’s expected value .Carrie shows __________

7. Beta is the slope of a _____________

8. A measure of “risk per unit of expected return” is _________________

9. The greater the beta, the ___________________ of the security involved.

10. A single overall cost of capital is often used to evaluate projects because,it avoids the problem of
computing the required rate of return for ___________________

11. Shares having no face value are known as ____________

12. A fixed rate of___________is payable on debentures.

13. The effective cost of debenture is ________as compared to shares.

14. Bond duration measures _________and ___________

15. The percentage return that the investor will receive is __________

16. Securities which earns interest or dividend at fixed rate for a stipulated period of
time___________________

17. _____________ is a contract between bond holders and bond issuers which is certain right and
regulations to both the parties.

18. ___________ is the process of determining the bond values.

19. An equilibrium model which is used for measuring the risk-return trade-off for all assets is
________________

20. ____________ is the model which assumes that the dividend per share grows at a constant rate.

C) Concept based questions :

1.Risk
2. Returns.

3. Shares.

4. Securities.

5. Portfolio

6. Modern portfolio theory

7. Traditional portfolio theory

8. Portfolio management.

9. CAPM

10. Gordon model

11. Markowitz model

12. Risk management.

13. Discretionary portfolio method

14. Non-discretionary portfolio method

15. Active portfolio method.

16. Passive portfolio method.

17. Coefficient of variation.

18. Investment plan

19. Risk bearing

20. Return taking

21. Consideration of portfolio management.

22. Types of portfolio management.

23. Characteristic line.

24. Risk aversion.

25. Systematic risk of securities.

Key to MCQ’S :
1 2 3 4 5 6 7 8 9 10

A A A A C B A D A C

11 12 13 14 15 16 17 18 19 20

C C A B A B C C A A

21 22 23 24 25

A B A A A

Explanation to MCQ’S :

1. A portfolio is sum of all the shares , debentures , bonds , any of the investments of an individual in
a consolidated form . This consolidation of all the investments is portfolio.

2. Since portfolio is consolidation of all the investments of an individual, the returns of all the
investments will lead to the return of the portfolio.

3. Traditional portfolio method which is being followed from ages emphasizes more on character
and risk taking capacity of the individual.

4. According to the traditional portfolio theories, a young single adult would be adviced to take
dynamic rapidly growing firms securities.

5. Portfolio management refers to proper managing of all the securities, investments of an

individual in a way he earns more profits in required time frame.

6. Portfolio management is the managing of various assets of the individual in a way he earns more
profit with less risk in a given stipulated time.

7. Since portfolio management refers to managing of all the investments of an individual with less
risk and high returns , it presents the best investment plans.

8. Under portfolio management while giving investment advices to portfolio manager considers the
age , income, budget and risk taking capacity of an individual.

9. According to portfolio management it minimizes the risk involves and maximizes the returns.

10. Portfolio management takes into consideration all the factors of the investor ( risk taking
capacity , budget etc..) Therefore , it proposes best suitable plan for the investor.

11. There are four types of portfolio amangement methods. They are, Active portfolio management,
passive portfolio amangement, discretionary portfolio management and non discretionary portfolio
management.

12. Portfolio management is the managing of various assets of the individual in a way he earns more
profit with less risk in a given stipulated time.
13. Under act to portfolio management , portfolio manager actively participates in buying and selling
of securities.

14. Under passive method , the portfolio manager deals with fixed portfolio design matching with
current market scenarios .

15. Under discretionary portfolio managing method, investor appoints portfolio manager to look
after all his assets.

16. Under non discretionary portfolio managing method , the portfolio manager explains just clients
about what is good and bad of the investment.

17. The modern portfolio theory which is being used currently, traditional portfolio theory which is
also being used sometimes are formed under the constraints of risk and returns.

18. The modern portfolio theory which was proposed by famous economists Markowitz and sharpe
consider different factors in establishing most efficient portfolio of the investor.

19. The traditional portfolio theory which is one of the two various methods of portfolio theories
emphasizes more on the individual securities of the investor.

20. The modern portfolio theory emphasizes more on combination of securities unlike traditional
theory which emphasizes on individual securities.

21. The measure of risk takes into account both the constraints i.e, the possibility of bad outcomes
and their consequences.

22. The individual risk of securities is very different from risk of the portfolio. Risk of the portfolio
comprises of various risks of securities in the portfolio.

23. Instead of measuring the risk of portfolio, the measure of risk is based on the extend of deviation
from expected returns.

24. Under modern portfolio theory, diversification of securities in portfolio is necessary but to a
certain extend proposed on evaluating securities.

25. Under Markowitz portfolio theory, he based his theory on different assumptions which are
practical and which are non-practical. One of the assumptions is investor is very knowledgeable
about securities market.

Key to fill in the blanks :

1. Covariance

2. Greater than zero

3. Characteristic line

4. Systematic risk of security

5. Less than one

6. Risk aversion

7. Characteristic line

8. Coefficient of variation

9. Greater than unavoidable risk

10. Each investment proposal

11. No par stock

12. Interest

13. Lower

14. Time structure, Interest rate risk

15. Bond yield

16. Fixed income securities

17. Bond indenture

18. Bond valuation

19. Capital- Asset pricing model

20. Gordon model

Key to concept based questions :

1. Risk is nothing but the possibility of potential loss for the company which is expressed in terms of
financial language. We generally term it as risk.

2. When an investor invests in a security of any company, he expects something in return for his
investment in the company which is known as return.

3. Shares are the instruments for an investor for investment. There are two types of shares currently
gets traded in market. They are preference shares and equity shares.

4. Securities are nothing but shares or tools which helps the investor to invest in any company or
government companies for his investment.

5. The combination of various types of securities (i.e,) all the instruments from various companies
from various fields are known as portfolio.

6. Modern portfolio theory (or) Mean variance analysis is a mathematical framework for assembling
a portfolio of assets such that expected return is maximised and risk is minimised.
7. Traditional portfolio theory is a non-quantitative approach to balance a portfolio with different
assets, such as stocks and bonds.

8. The managing of various securities from various sectors of companies of the investor is known as
portfolio management.

9. CAPM is Capital asset pricing model which helps the investor to ascertain the expected return
from the investment in certain securities.

10. Gordon model values a company’s net worth using the assumption that there will be constant
growth in payments by the companies.

11. Markowitz formula was first proposed by Henry Markowitz in the year 1952. It helps the investor
to pick an optimised model as most efficient portfolio.

12. The management of risk associated with various forms of securities in a portfolio is risk
management. Risk can never be a zero but it can be managed.

13. It is a portfolio management type where buying and selling of shares in a portfolio is taken by a
portfolio manager.

14. It is a portfolio management type where decisions will be taken by the investor, but the portfolio
manager or broker will act just as a broker.

15. This portfolio management where using various techniques, the returns gets maximised with
minimum risk.

16. It is a strategy which focus on maximising diversification of the portfolio. It is more of market
index mirror.

17. The coefficient of variation also known as relative standard deviation is a measure of dispersion
of probability or frequency distribution. It is always used to express risk of the securities.

18. Investment plan is nothing but the planning of investment of a portfolio with an objective of
maximising return with minimum risk.

19. The amount of risk the investor agreed to take on while investing his funds in a portfolio is risk
bearing.

20. The amount of return which the investor expects and receives in practical from the investment in
a portfolio is return taking.

21. The diversification into international investments and other assets classes which derive return as
well as risk is main consideration in portfolio management. Another important consideration is
human capital.

22. There are two types of portfolio management. Discretionary portfolio management and Non-
discretionary portfolio management.
23. Characteristic line is a straight line formed using recreation analysis that summarizes particular
securities risk and return.

24. It is hesitation of a investor to agree to a situation with an unknown pay off rather than another
situation with more predictable pay off. (i.e,)generally investor tends not to take risk.

25. Systematic risk is vulnerability to the events which affect aggregate outcome such as returns by
the investor.

UNIT-V EVALUATION OF PORTFOLIO :

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25

A) Choose the correct answers:

1. Portfolio evaluation is evaluation of ____ of the portfolio.

a) performance b) value c) net assets d) none

2. Proper portfolio evaluation subject to comparing with

a) normal portfolio b) stock market c) bench mark portfolio d) none

3. Portfolio management is ____________ in portfolio management.

a) first step b) last step c) both a and b d) none

4. without this portfolio management will be incomplete

a) portfolio creation b) portfolio evaluation c)both a and b d) none

5. When individual takes up evaluation of his own portfolio , this is known as

a) self assessment b)portfolio analysis c) outside agency analysis d) none

6. Under this method the investor constructs and manages the own portfolio

a) self evaluation b) outsider evaluation c) both d) none

7. Investment company generally creates

a) customised portfolio b) same portfolio c)both a and b d) none

8. In investment company each portfolio performance indicates a performance of

a) portfolio manager b) debtor c) creditor d) none

9. In India currently ____________ and _____________ are competing each other in providing
investment oppurtunities.

a) mutual funds and investment company

b) public company and private company

c) banks

d) NBFC’s

10. Investor usually gets attracted to

a) high return b) minimum risk c) both a and b d) none

11. Investor while investing asses or compare the performance of mutual funds

a) statement is true

b) statement is false

c) none of the statement is true

d) it is partially true and partially false

12. These ae used for taking the timing of the investment.

a) formula plan b) constant rupee plan c) none d) all

13. These plan does not work in selection of securities.

a) formula plan b) normal plan c) portfolio plan d) none

14. These formula plans are

a) strict and rigid b)flexible c) both d) none

15. There is a problem of adjustments with changing environmental conditions under this

a) formula plan b) portfolio plan c)none d) all

16. Formula plans cannot be used for this time frame

a) short periods b) long period c) middle period d) none

17. Formula plans works with this time frame

a) longer period b) shorter period c) none d) all

18. The Formula plans has different kinds of forecasting techniques

a) yes b) no c) partly yes d) partly no

19. Formula plan works according to

a) methodology b) relativity c) simplicity d) none

20. This plan indicates the rupee value which remains constant of stock portfolio

a) constant rupee plan b) formula plan c) both d) none

21. According to constant rupee plan , the aggressive portfolio should remain

a) constant b) flexible c) rigid d) none

22. According to constant rupee plan, when the share prices increases the investor needs to

a) sell the security b) buy the security c) hold the security d) none

23. According to constant rupee plan, the investor needs to buy the shares when share prices

a) falls b) increases c) neutral d) none

24. The action point in constant rupee plan is also known as

a) reference plan b) revaluation point c) both d) none

25. According to constant rupee plan , the __________ of securities are very crucial.

a) timing b) turning point c) both d)none

B) Fill in the blanks :

1. The sharpe index assigns the high value to funds that have __________________

2. According to Treynor index , a steep slope would indicate that the fund is ___________

3. In the Treynor index , the performance of the fund depends on the _________ and
_______________

4. If the market return is 20% and the riskless rate of return is 7%. The fund’s beta coefficient is 1.2
Then the expected return will be _____

5. The portfolio risk premium is 12% , the market’s and fund’s returns standard deviations are 4 & 3,
the fund’s beta value is 1.5, then Treynor index is ____

6. Jensen’s performance index gives importance to the _____________

7. Reward to volatility ratio is also termed as ___________

8. The actual value of investments made by the mutual funds for each unit issued by it is ____

9. A change in portfolio profile buying and selling shares in response to new information is
__________________

10. Pearl mutual funds return variance is 25 , the funds return is 18% and the risk-free rate of return
is 5%. Then sharpe index is ______

11. _____________refers to the evaluation of the performance of the portfolio.

12. The ____________are strict , rigid and straight forward but they are not flexible.

13. A____________can be made by a investor by making a study of a complete school of stock

prices.

14. ________ measure is the measure of portfolio’s excess return per portfolio’s beta coefficients.

15. ___________ are judicious combination of industrial stocks and bonds.

16. NAV refers to ___________ of a mutual fund.

17. ______________ is a long term approach designed to allocate the assets by selecting an effective
portfolio which consists of various suitable assets.

18.____________signals the trust of the investor in the stock market.

19. The purpose of _____________ is to maintain the existing portfolio in act in the light of changing
liquidity needs and to maintain adequate diversification.

20. The ratio which attempts to measure the differential between actual return earned and return
expected from portfolio is Jensen’s ______________

C) Concept based questions :

1. Treynor’s model

2. Jensen model

3. Sharpe’s model

4. Portfolio

5. Mutual funds

6. Investment companies

7. Constant rupee plan.

8. Formula plan

9. Portfolio creation

10. Portfolio evaluation

11. Portfolio management

12. Self evaluation of portfolio

13. Customised portfolio

14. Investment

15. High risk

16. Minimum risk

17. Time frame of formula plan.

18. Methodology of formula plan.

19. Portfolio rebalancing

20. Balanced fund

21. Confidence index

22. Portfolio upgrading

23. Strategic asset allocation

24. NAV

25. Benchmark portfolio

Key to MCQ’S :

1 2 3 4 5 6 7 8 9 10

A C B C A A A A A C

11 12 13 14 15 16 17 18 19 20

A A A A A A A A A A

21 22 23 24 25

A A A B C

Explanation to MCQ’S :

1. Portfolio evaluation is nothing but evaluating the risk and return and its viability in current market
scenario.
2. Proper portfolio evaluation will be subject to comparing the returns of the portfolio with one or
more portfolio or benchmark portfolio.

3. Under various steps involved in portfolio management, portfolio evaluation with benchmark
portfolio is the last step of portfolio management.

4. Eventhough portfolio creation and portfolio evaluation are major steps in creating an optimised
portfolio. There are many other steps involved in portfolio creation but, these two steps are very
important.

5. When an individual evaluates his own portfolio risk and returns based on his own knowledge ,
then it is known as self evaluation of portfolio. It is one of the types of portfolio evaluation.

6. Under self evaluation , the investor himself with the little knowledge he is having ,he constructs
and manages his own portfolio of securities.

7. Investment company or mutual fund creates number of portfolios with different objectives
according to the needs and desires of the investors.

8. In investment company different portfolios according to the needs of investors are assessed
individually to measure the performance of portfolio managers .

9. Mutual funds and investment company are competing each other in current market scenarios in
providing various investment oppurtunities and to mobilise the investments of individual into
investments.

10. Generally an investor investing in an investment would prefer maximum returns with lower risks.
Therefore, he chooses mutual funds or investing companies which provides such flexibility.

11. The investor while investing in a mutual fund or investment companies assess the past
performance of mutual funds or investment companies to place his funds in such mutual funds or
investment companies.

12. The formula plans is useful to make the decisions regarding the timing of the investment. These
are generally made by portfolio managers during portfolio investments.

13. Formula plans helps in deciding the timing of the investments , not in the selection of securities
of portfolio.

14. The formula plans which are used in making the decisions of the timing of the investments are
strict and rigid. They are not flexible.

15. Formula plans which are used for decision of timing of investment are strict and straight forward.
The investors has to face some problem of adjustment with changing environmental conditions.

16. The formula plans which are rigid, strict and straight forward but does not have flexibility cannot
be used for shorter period of time. They need some longer period to adapt.

17. The formula plans unlike other plans needs longer period of time to see their results and to give
scope to them to work on their portfolio.
18. The formula plans which is used for making decisions of timing of investment does not eliminate
need for forecasting but it has different kinds of forecasting.

19. The formula plan which is used for decision of timing of investment works according to a
methodology which is related to working of each method. It is very strict, rigid and needs longer
period.

20. The constant rupee value plan is the plan in which the rupee value remains constant of stock
portfolio of the total portfolio.

21. Under constant rupee plan , in which rupee value remains constant of stock portfolio needs
aggressive portfolio to be constant throughout the trading.

22. According constant rupee plan, portfolio remains constant during price rise of the shares, the
investor needs to sell the shares.

23. According to constant rupee plan, where aggressive portfolio remains constant when aggressive
securities remain in portfolio, the investor needs to buy securities when share prices fall.

24. In constant rupe plan, these revaluation points helps the investor to transfer his shares from
aggressive securities to conservative securities.

25. According to constant rupee plan, their aggressive portfolio needs to be constant and in the
times of revaluation, there it should be transferred to conservative securities. Therefore, the timing
and transfer of securities is very crucial.

Key to fill in the blanks :

1. Higher risk adjusted returns

2. Sensitive to the market

3. Risk premium, Beta coefficient

4. 22.6

5. 8.0

6. Predictive ability of the manager

7. Treynor ratio

8. NAY

9. Portfolio upgrading

10. 2.6

11. Portfolio evaluation

12. Formula plans

13. Rupee average

14. Treynor’s

15. Balanced funds

16. Net asset value

17. Strategic asset allocation

18. Confidence index

19. Portfolio rebalancing

20. Measure of ratio

Key to concept based questions :

1. Treynor’s model is a portfolio optimisation model that helps in maximising portfolios ratio by
combining actively managed portfolio with passively managed market fund.

2. It is a measure which is risk adjusted performance measure that represents average return of
portfolio predicted by capital asset pricing model.

3. It was developed by Nobel laureate William Sharpe, used to help the investors understand the
return of investments compared with its risk.

4. Portfolio is nothing but the mix of securities or the diversification from various sectors of nation’s
companies.

5. It is nothing but pooling of funds from various investors and there will be a management company
which allocates the investor’s funds into various securities.

6. Investment companies are nothing but the companies which accept investment from the
investors by offering them returns.

7. This indicates rupee value remain constant. In this stock portfolio of the total portfolio, investor
invests a part of his fund in aggressive portfolio and part in conservative portfolio.

8. The buying and selling of securities according to a predetermined formula by the investor is
known as Formula plan. This approach intended to eliminate investor’s emotions.

9. The creation of a portfolio of an investor which contain securities from various sectors of the
economy is known as portfolio creation.

10. The evaluation of the portfolio by a professional considering various considerations and the
returns ans risks associated with the securities in portfolio is portfolio evaluation.

11. The portfolio management is management of various securities in the portfolio to optimise its
risk and maximise its return. It involves buying and selling of securities.
12. The evaluation of risk and return associated with securities in the portfolio by the investor
himself is known as self evaluation.

13. The portfolio prepared according to the economical and behavioural status of the investor is
known as customised portfolio.

14. The investment of savings or funds of an investor in a company or securities to earn return is
known as investments.

15. Different securities in a portfolio has different types of risks. The securities which contain more
risk compared with other securities in the portfolio is said to have high risk.

16. The securities in the portfolio which contain less risk compared with other securities is known as
minimal risk containing securities. Generally, government securities contain less risk.

17. The portfolio which is once selected has to be continuously reviewed over period of time and
then revise depending on the objectives of the investor. This is time frame in Formula plan.

18. The methodology involved in formula plan is it helps investors make decisions on timing of the
investments. Securities will be selected on the basis of this methodology related to economics.

19. The buying and selling of securities in the portfolio to adjust its risk with return is known as
portfolio rebalancing.

20. The mutual fund consisting stock component, bond component, money market component in a
single portfolio is balanced fund.

21. It is an economic indicator published by conference board to measure consumers confidence in a

particular security.

22. The diversification of securities in the portfolio to the next level with the object of maximising
returns with minimal risk is portfolio upgradation.

23. Strategic asset allocation is strategically allocating the funds of the portfolio in various sectors of
the economy with main objective of receiving more returns.

24. NAV is the value for the portfolios given by the mutual funds. This will be attached to the units of
the mutual funds.

25. Benchmark portfolio is nothing but the portfolio which gives maximum returns with minimum
risk is known as benchmark portfolio for the other portfolios.