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FINE006N

1. Convexity is the measure of _______ relationship between Bond yield and Bond
• Linear
• proportionately Inverse
• Curvilinear
• Quadratic

2. A manager who uses the mean-variance theory to construct an optimal port

satisfy-
• investors with low risk-aversion coefficients
• investors with high risk-aversion coefficients
• all investors, regardless of their level of risk aversion
• only clients with whom she has established long-term relationships, because s
their personal preferences.

3. Investment planning takes steps to

• Balance risk with desired risk
• Balance risk with desired return
• Balance return with desired return
• Balance return with desired risk
4. ______
• Theyfocus
only
are
acceptmore
willing
care onaccept
past
investments
about
to price
ratethat
of aremovements
lower
return.
returns and of
fair games. a firm's
high risk. stock than on the u
6. Which group of shares belongs to the companies with large outstanding shares, g
determinants of future profitability.
record and large volume of business in the secondary market
• Credit analysts
• A group
• Fundamental analysts
• Bl group
• System analysts
• B group
• Technical analysts
• Al group
5. Which of the following statements regarding risk-averse investors is true?
7. Immunisation by way of cash flow matching involves buying:
• They only accept risky investments that offer risk premiums over the
• High convexity bond
rate.

Page 1 of 17
 • Any
Sterilised
Zero one
coupon
ofbond
thebond
above
8. The three broad categories of financial assets are
• Money market securities, long-term debt and equity
• Corporate securities, derivatives and equity
• Debt, equity and derivatives
• All of the given options

9. Financial intermediaries differ from other businesses in that both their assets
liabilities are mostly
• Illiquid
• Owned by government
• Real
• Financial

10. If the semi-annual yield of a plain vanilla bond is five percent, the annual percen
is:
• 10 percent
• Slightly more than 10 percent
• Slightly less than 10 percent
• Compounded value of 10 percent

11. Which of the following is/are limitations of employing leading indicators?

• Some of the turns prove to be misleading.
• Contrasting signals given by some of the lead indicators
• Time consumed in identifying the change in the indicator as genuine
• Some of the turns prove to be misleading and contrasting signals given by
the lead indicators

12. An active portfolio manager faces a tradeoff between 1. using the Sharpe measure
mean- variance analysis. Ill. exploiting perceived security mispricings. IV. ho
much of the risk-free asset. V. letting a few stocks dominate the portfolio.
• I and II
• II and V
• III and V
• III and IV

13. When the level of economic activity is low, stock prices are
• High
• Low
• Either High or Low
• Both high and low

14. A liquid asset may

 • be converted into cash
• be converted into cash with little chance of loss
• not be converted into cash
• not be converted without loss

15. Interest rate risk occurs when

• The market price of bond moves inversely to the prevailing market interest ra
• The variability in yield is due to the market interest rate fluctuations
• There is variability in the market interest rates
• all of these

16. Although derivatives can be used as speculative instruments, businesses most

them to
• Hedge
• Offset debts
• Attract customers
• Enhance their balance sheet

17. Default Premium is a function of _

• Business Risk
• Financial Risk
• Size of Business
• All of These

18. Institutional Investor

20. •TheDebt,
Money
Corporate
three equity
broad
Maintainsmarket
securities,
categories
and
securities,
derivatives
relatively derivatives
of long-term
financial
constant andassets
profile debt
equity
over and
are equity
time
•• All of the given options
Legal and regulatory constraints
• Well-defined and effective policy is critical
21. If• the semi-annual
None yield of a plain vanilla bond is five percent, the annual percen
of the above
is:
19. •Which10 percent
of the following is/are an example of systematic risk of a stock?
•• Slightly more
Interest rate than 10 percent
risk.
• Financial risk.
• Political risk.
• Interest rate risk & political risk

• Slightly less than 10 percent

• Compounded value of 10 percent

22. The Dow Theory posits that the three forces that simultaneously affect stock
_______. 1. Primary trend II. Intermediate trend III. Momentum trend V. Mino
Contrarian trend
• I, II & IIII
• I, II, III & IV
• II, II, & IV
• I, II & IV

23. A company can benefit from economies of scale in relation to

• Production Cost
 • 50
30
33 stocks channels
stocks
Distribution
• _____,
25. In Purchasing raw materials
the supply of scrip is greater than the demand and a further rise in
• all of these
prevented.
• Resistance level
24. •TheSupport level
Nifty has
25 stocks trend
• Secondary
• Primary trend

FINE006N
 deviation of the market's returns.
• The variance of the security's returns divided by the covariance between the s
and market returns.
• The variance of the security's returns divided by the variance of the market's

3. As the debt ratio increases,

• fewer assets are debt-financed, and the ratio of debt-to-equity increases
• fewer assets are debt-financed, and the ratio of debt-to-equity decreases
• more assets are debt-financed, and the ratio of debt-to-equity increases
• more assets are debt-financed, and the ratio of debt-to-equity decreases

4. The first stock exchange in India was established in which city in 1875?
• Bangalore
• Calcutta
• Chennai
• Bombay (Mumbai)

5. The confidence index reveals

• The depth of price changes
• The momentum of price changes-
• The velocity of price changes
• How willing investors are to take a chance in the market.

6. Purchase ABC co. shares at Rs. 200?. This order is a

• limit order
• best rate order
• discretionary order
• stop loss order

7. In private placement
• shares are offered through letter of offer
• shares are offered through prospectus
• shares are offered through brokers
 • shares are offered through investment bankers

8. A measure which reflects the effectiveness and efficient use of firm's resources is
• Return on equity
• Return on assets
• Operating profits
• Earnings after tax

9. Suppose two portfolios have the same average return, the same standard deviatio
returns, but portfolio X has a higher beta than portfolio Y. According to the Shar
measure, the performances of portfolio X
• is the same as the performance of portfolio Y
• is better than the performance of portfolio Y
• is poorer than the performance of portfolio Y
• cannot be measured as there is no data on the alpha of the portfolio

10. When a technical analyst says a stock has good "relative strength", he means that
• The stock should perform well relative to other stocks in the same industry
• The ratio of the price of the stock to a market index shows an upward tre
• The total returns on the stock has exceeded the total returns on the bond
• Trading volume in the stock has been increasing

11. Assume that a security is fairly priced and has an expected rate of return of 0.13.
market expected rate of return is 0.13 and the risk-free rate is 0.04. The beta of th
is
• 1.25
• 1.7
• 1
• 0.95

12. Portfolio theory as described by Markowitz is most concerned with

• The elimination of systematic risk.
• The identification of unsystematic risk.
• The effect of diversification on portfolio risk.
• Active portfolio management to enhance returns.

13. The stock above the security market line is

• Overpriced
• Underpriced
 • Appropriately priced
• Of high risk

14. An investor who follows a ______ portfolio and stays with it. strategy selects a b
• Immunization
• Laddering
• Indexing

• Buy & Hold

15. The issue can be priced at premium by

• any public issue of listed company with three years track record of sales
• any public issue of listed company or unlisted company with three years
record of profitability
• any public issue of unlisted company with three years track record of personn
management
• none of these

16. Securities which are plotted above the SML line are
• Under priced
• Overpriced
• Favorable investments
• Both underpriced and favourable investment

17. The goal of fundamental analysts is to find securities

• with high market capitalization rates
• with a positive present value of growth opportunities
• whose intrinsic value exceeds market price
• All of these

18. Market indicators are employed in

• Studying the behavior of the stock market
• Evaluating the performance of the portfolios
• Calculating betas of the securities
• all of these
19. Which statement about portfolio diversification is correct?
• Proper diversification can be achieved by increasing the number of stocks.
• The risk-reducing benefits of diversification do not occur meaningfully until
50-60 individual securities have been purchased
• Because diversification reduces a portfolio"s total risk, it necessarily reduces
portfolio"s expected return.
• Typically, as more securities are added to a portfolio, total risk would be
expected to decrease at a decreasing rate

20. Identify the uncontrollable risk of a company

• Labour problem
• increase in loan services
cut in subsidy

markets without any net investment. IV. Construct a zero-beta investment portfo
will yield a sure profit.
• 1&2
• 1&3
• 2&3
• 3&4

22. Financial securities with a maturity of less than a year from their original issue d
sold in the
• Money market
• Bond market
• Equity market
• Derivative market

23. To frame the investment policy, the investor should have

• investible funds
• knowledge about the investment alternatives
 • knowledge about the market and funds
• all of these

24. According to the Arbitrage Pricing Theory, an investor would try to increase retu
his portfolio
• By increasing the risk
• By increasing the portfolio funds
years is 8 percent. Calculate the approximate Forward rate for second year?
• 0.08
• 0.16
• 0.07
• 0.09

27. Relationship between Modified Duration (D*) and Macauley Duration (D) is exp
• D* = 1/(7+D)
• D = 1/(1+D*)
• D* = D/(1+y)
• D = D*/(1+y)

28. A Rs.1,000 par value bond, bearing a coupon rate of 9 percent will mature after 5
the required rate of return on the bond is 10 percent, what is its value?
• Rs.1000
• Rs.962
• Rs.973
 • Rs.958

• Dedication strategy
• Balanced strategy
• None of these

TEST 2

1) In a limited company
• the shareholders have to divide the debt of the company and pay
• the shareholders are not liable to pay the debt
• the shareholders have to pay the debt to the extent of their shares
in the capital
• common stock and preference shareholders have to pay the debt

2) Security C has expected return of 12% and standard deviation of 20%. Security D
expected return of 15% and standard deviation of 27%. If the two securities have
correlation coefficient of 0.7, what is their covariance?
• 0.038
• 0.0.07
• 0.018
• 0.013

3) In the active approach the investor continuously studies.

• Group related risk
• Market related risk
4) The BSE base period is
• 1978-79
• 1977-78
• 1981-82
• 1983-84

5) The critical variable in the determination of the success of the active portfolio is
• alpha/systematic risk
• alpha/nonsystematic risk
• gamma/systematic risk
• gamma/nonsystematic risk

6) Mr. A purchase a stock in the stock market. His holding period return depends on
• Purchase price of the stock
• Selling price of the stock
• Dividend paid to the stock
• All of these

7) Registrar to the issue

• helps in the appointment of lead managers
• drafts the prospectus
• recommends the basis of allotment
• directs the various agencies involved in the issue

8) A comprehensive legal framework was provided by the Securities and Exchange

India (SEBI) Act passed in the year
• 1991
• 1929
• 1992
• 1956

9) The first stock exchange in India was established in which city in 1875?
• Bangalore
• Calcutta
• Chennai
• Bombay (Mumbai)

10) The characteristic line establishes the relationship between

• Return on a security and its beta
11) Which of the following is excluded from the fixed income securities?
• Bonds
• Preferred stock
• Saving deposits
• Options

12) Financial securities with a maturity of less than a year from their original issue d
sold in the
• Money market
• Bond market
• Equity market
• Derivative market

13) In private placement

• shares are offered through letter of offer
• shares are offered through prospectus
• shares are offered through brokers
• shares are offered through investment banker

14) The security market line describes the expected return for
• The efficient portfolio
• The inefficient portfolio
• All portfolios and assets
• The efficient and inefficient portfolios

15) When a bond pays periodic interest there is a risk that the interest payments may
be reinvested at a lower interest rate. This is called
• Price Risk
• Interest Rate Risk
• Market Risk
• Liquidity risk
16) Competition in an industry is generally affected by the
• Ease with which the new entrants can enter
• Relationship among the existing players
• Bargaining power of buyers and suppliers
• all of these

17) Risk in the purchase of Infosys and Wipro stocks can be eliminated when
• г= +0.2
• r = -1
• r= 0
• r = 0.1

18) The following factors might affect stock returns.

• The business cycle.

• Inflation Rates
• All of these

19) On the capital market line lies

• All the efficient and inefficient portfolios
• Only the efficient portfolios
• All the efficient portfolios and securities
• All portfolios and securities

20) The Sensex has

• 25 stocks
• 30 stocks
• 33 stocks
• 35 stocks

21) Consider the data: risk free rate 6.5 percent, Betal.24, and Market return 11.5%.
expected return for the above security will be:
• 11.7 percent
• 12.7 percent
 • 13.7 percent
• 14.7 percent

22) In the strong form of efficient market,

• All available information is reflected on the price.
• All published information is reflected on the price.
• Stock price reflects past prices.
• all of these
Stock prices show the growth or fall of the company.

25) Primary market and secondary markets

• compete with each other
• complement each other
• function independently
• control each other

26) Suppose the spot rate for the first year is 7 percent and the spot rate over a period
yearsis 8 percent. Calculate the approximate Forward rate for second year?
• 0.08
• 0.16
• 0.07
• 0.09

27) A Rs.1,000 par value bond, bearing a coupon rate of 9 percent will mature after 5
 the required rate of return on the bond is 10 percent, what is its value?
• Rs.1000
• Rs.962
• Rs.973

• Cash flow matching strategy

• Dedication strategy
• Balanced strategy
• None of these

30) Which one of the following can affect real interest rate:
• Expected higher inflation
• Tax law changes
• Heightened competition for funds
• Both Tax law changes and Heightened competition for funds
 reduced
3. The following factors might affect stock returns: All of these
4. When the economy is booming, one will find increased levels of expenditure on- Consu
durables
5. The confidence index reveals: How willing investors are to take a chance in the mark
6. Suppose two portfolios have the same average return, the same standard deviation of retu
portfolio X has a higher beta than portfolio Y. According to the Sharpe measure, the per
of portfolio X - is the same as the performance of portfolio Y.
7. As the debt ratio increases - More assets are debt-financed, and the ratio of debt-to-e
increases
8. who was the grandfather of technical analysis- Charles Dow.
9. Which of the following industry is sensitive to business cycle and price changes? Cyclic
industry
10. Portfolio theory as described by Markowitz is most concerned with- The effect of diver
on portfolio risk.
11. The investors should have knowledge about - All of these
12. Supply-side economists wishing to stimulate the economy are most likely to recommend
increase in the real interest rate
13. Registrar to the issue- Recommends the basis of allotment
14. Markowitz approach has root in- Analyzing the risk and return related to stock
15. Consider a stock with a required return of 11%, the market return is 10% and the T-bill
5%. The stock can be classified as- Aggressive
16. Competition in an industry is generally affected by the- All of these
17. In a well-diversified portfolio- Unsystematic risk is negligible
18. Assume that a security is fairly priced and has an expected rate of return of 0.13. The ma
expected rate of return is 0.13 and the risk free rate is 0.04. The beta of the stock is- 1
19. If you believe in the ______ form of the EMH, you believe that stock prices reflect all r
information including historical stock prices and current public information about the fir
not information that is available only to insiders. Semi-strong
20. To take advantage of an arbitrage opportunity, an investor would: I. Short sell the asset
low-priced market and buy it in the high-priced market. II. Construct a zero-investment
 that will yield a sure profit. III. Make simultaneous buys in two markets without any net
investment. IV. Construct a zero beta portfolio that will yield a sure profit. - I and III on
21. In the strong form of efficient market- All available information is reflected on the pr
22. Ideally, clients should invest with the portfolio manager who has- the highest Sharpe m
23. The process of estimating the dividends and earnings that can be expected from the firm
determinants of value is called- Fundamental analysis
24. According to the Arbitrage Pricing Theory, an investor would try to increase returns from
portfolio by- Increasing the risk
25. NSE was recognized on a permanent basis in- 1993
26. Which of the following strategies eliminates interest rate risk and the need for periodic
rebalancing? Dedication strategy
27. A Rs.1,000 par value bond, bearing a coupon rate of 9 percent will mature after 5 years.
required rate of return on the bond is 10 percent, what is its value? Rs. 958
28. Suppose the spot rate for the first year is 7 percent and the spot rate over a period of two
percent. Calculate the approximate forward rate for the second year? - 0.09
29. Prices of bonds with greater convexity (curvature) increase____ when yields falls and
decline______ when yields rise. - More, less.
30. Which one of the following can affect real interest rate: Both Tax law changes and Hei
competition for funds

TEST 1
1. Identify the uncontrollable risk of a company- Technological obsolescence
2. The ______measures the reward to volatility trade off by dividing the average portfolio
return by the standard deviation of returns. Sharpe measure
3. If interest rates decrease, business investment expenditures are likely to _______ and co
durable expenditures are likely to _______. Increase, increase
4. In a limited company: the shareholders have to pay the debt to the extent of their share
capital
5. Which of the following is not an assumption of technical analysis: Market value is dete
solely by the forces of demand and supply.
6. Which of the following is not an assumption of technical analysis: Supply and demand
governed by purely irrational factors

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FIN537 Gamma Financial

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