​ Q1 "There is a trade-off between risk and return." Explain this statement. Q2 "Stock exchanges act as barometers of the health of the economy." Discuss. Q3 What is Beta? How is it interpreted? Q4 "Fundamental analysis provides an analytical framework for rational investment decision making.'' Explain. Q5 Explain the merits and demerits of technical analysis as a tool of security analysis. Q1 "When someone refers to efficient capital markets, they mean that security prices fully reflect all available information." Q2 "CAPM postulates the nature of relationship between the expected return and the systematic risk of a security." Explain. Q3 "Forward contracts are a part of everyday life." Explain. CASE STUDY: You are given the following historical performance information on the capital market and a mutual fund: Year Mutual fund beta 0.90 0.95 0.95 1.00 1.00 0.90 0.80 0.75 0.75 0.70 Calculate the following risk adjusted return measures for the mutual fund: (a) Reward-to- variability ratio or Sharpe ratio (b) Reward-to- volatility ratio or Treynor ratio Comment on the mutual fund's performance. Q1. For investment purposes: (a) Common stock is considered a fixed income security (b) Preferred stock is considered a fixed income security (c) Both are considered fixed income securities. (d) Derivatives is considered fixed income securities Q2 The scores that have the greatest effect on the value of the variance are those (a) below the mean (b) nearest the mean (c) farthest from the mean (d) none of the above Q3 Without violating the rules of CAPM, which of the following strategies may be undertaken in an attempt to earn a return that's greater than that of the market? (a) Short sell securities that have a beta of less than one and purchase the market (b) Purchase securities that have a higher standard deviation than that of the (c) Purchase securities whose correlation coefficient with that of the market is (d) All of the above. Q4 An investor seeking to capitalize on a strong market upswing reduces her money market holdings and greatly increases her holding of stocks. This investor is primarily increasing: (a) Total risk (b) Systematic risk (c) Non market risk (d) Unsystematic risk Q5 An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 15 percent and a variance of 400 and 70 percent in a T-bill that pays 6 percent. His portfolio's expected return and standard deviation are __________ and _________ respectively. (a) 8.7%, 12% (b) 8.7%, 6 % (c) 11.4% , 6% (d) 12%, 6% portfolio. market. greater than one. Q6 Points under capital allocation line are __________ by investors. (a) desirable but not achievable (b) achievable but not desirable (c) both desirable and achievable (d) neither desirable nor achievable Q7 Which statement about portfolio diversification is correct? (a) The risk-reducing benefits of diversification do not occur meaningfully until (b) Because diversification reduces portfolio's total risk, it necessarily reduces the (c) Typically, as more securities are added to a portfolio, total risk would be (d) None of the above. Q8 Assume risk free-rate is 5%. The expected return on market portfolio is 12%, and its standard deviation is 20%. A company has an expected return of 18%, a standard deviation of 30% and a correlation of 1.5 with the market. What is the company's Treynor Ratio? (a) 0.047 (b) 0.058 (c) 0.087 (d) 0.092 Q9 What are the three main criteria used for portfolio analysis? (a) Balance, attractiveness and fit. (b) The BCG matrix, the Ashridge Portfolio Display and the Ansoff matrix. (c) Synergies, geographical spread and diversification. (d) Spread of risk; range of products; range of services. Q10 Which of the following best describes the relationship between the nature of diversification of a firm and the financial performance of that firm? (a) The more unrelated a firm's portfolio, the higher the financial performance. (b) The less diversified the portfolio the higher the financial performance. (c) Related and limitedly diversified companies perform better on average than (d) There is no relationship. Q11 Active portfolio management consists of __________. (a) market timing (b) security analysis (c) indexing (d) A and B at least 50-60 individual securities have been purchased. portfolio's expected return. expected to decrease (at a decreasing rate). both undiversified and heavily diversified companies. Q12. A purely passive strategy (a) uses only index funds. (b) uses weights that change in response to market conditions. (c) uses only risk-free assets. (d) is best if there is "noise" in realized returns. (e) is useless if abnormal returns are available. Q13 Consider these two investment strategies: Strategy ___ is the dominant strategy because __________. (a) 1, it is risk less (b) 1, it has the highest reward/risk ratio (c) 2, its return is at least equal to Strategy 1 and sometimes greater (d) 2, it has the highest reward/risk ratio (e) both strategies are equally preferred. Q14. Arbitrage is the presence of a (a) Fixed profit (b) Risky profit (c) Riskless profit (d) Maximizing profit Q15. Compounding refers to the: (a) Earning of interest on prospectively earned interest (b) Earning of interest on previously earned interest (c) Earning of interest on principal amount (d) B and C Q16. The three broad categories of financial assets are ____________. (a) Money market securities, long-term debt and equity (b) Corporate securities, derivatives and equity (c) Debt, equity and derivatives (d) All of the given options Q17. Which of the following is excluded from the fixed income securities? (a) Bonds (b) Preferred stock (c) Saving deposits (d) Options Q18. Financial securities with a maturity of less than a year from their original issue date are sold in the: (a) Money market (b) Bond market (c) Equity market (d) Derivative market Q19 Which of the following represents low-priced, speculative and risky securities? (a) Income stocks (b) Penny stocks (c) Defensive stocks (d) Cyclical stocks Q20 Which of the following is EXCLUDED from Porter's competitive factors? (a) Bargaining power of buyers (b) Rivalry between existing competitors (c) Substitute products or services (d) Changes in the economy Q21 If the standard deviation of stock A is 30%, standard deviation of stock B is 30% and the correlation between stocks A and B is 0.8, the co-variance between stocks A and B is: (a) 9% (b) 7.2% (c) 6.42% (d) 10%