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Description

Roots Institute of Financial Markets RIFM

Practice Book Investment Planning

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

Forward

Welcome to RIFM Thanks for choosing RIFM as your guide to help you in CFP Certification

Roots Institute of Financial Markets is an advanced research institute Promoted by Mrs

Deep Shikha CFPCM

RIFM specializes in Financial Market Education and Services

RIFM is introducing preparatory classes and study material for Stock Market Courses of NSE ,

NISM and CFP certification

RIFM train personals like FMM Students,

Dealers/Arbitrageurs,

Marketing personals,

Research Analysts and Managers

We are constantly engaged in providing a unique educational solution through continuous innovation

Wish you Luck……………

Faculty and content team,

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

Our Team Deep Shikha Malhotra CFPCM M

AMFI Certified for Mutual Funds IRDA Certified for Life Insurance IRDA Certified for General Insurance PG Diploma in Human Resource Management CA

Ravi Malhotra B

FCA DISA (ICA) CERTIFIED FINANCIAL PLANNERCM Vipin Sehgal CFPCM B

NCFM Diploma in Capital Market (Dealers) Module AMFI Certified for Mutual Funds

IRDA Certified for Life Insurance

Neeraj Nagpal CFPCM B

AMFI Certified for Mutual Funds IRDA Certified for Life Insurance NCFM Certification in: Capital Market (Dealers) Module Derivatives Market (Dealers) Module Commodities Market Module Kavita Malhotra

Previous (10th Rank in Kurukshetra University) AMFI Certified for Mutual Funds IRDA Certified for Life Insurance Certification in all Modules of CFPCM Curriculum (FPSB India)

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

Index Contents

Page No

INTRODUCTION TO INVESTMENT PLANNING 1-46

Investment Vehicles

Investment Strategies

124-128

Regulation of an investment advisor

129-133

Application to Clients

134-137

Samper Paper-1 Sample Paper-2 Answers Sample Papers

Important Questions

167-170

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

UNIT-1 INTRODUCTION TO INVESTMENT PLANNING 1

The inverse relationship between the price and interest rates of a fixed income instruments is an example of A

Business Risk B

Market Risk C

Competition Risk D

Interest rate Risk 2

Which of the following are characteristics of money market securities

They are issued by the Government,

municipalities and large corporations that have high quality ratings

All have terms to maturity that are 270 days are less

All tend to have large amounts of purchasing power risk

Both a and b E

A bond's duration measures which one of the following

The time structure of a bond's cash flows The bond's interest-rate risk Both a and b above The default risk of the bond issue

Y has invested in the shares of BPL Ltd

It’s been forecasted that due to entry of a lot of players in the same industry BPL Ltd

will face a very high level of competition

Y in this scenario is faced with A

Business Risk Market Risk Competition Risk Interest rate Risk

Municipal bonds that are backed by the income from specific projects are known as: A

Income bonds Revenue Bonds General Obligation bonds Debenture bonds

Bonds with higher coupons,

Have more interest-rate risk than bonds with smaller coupons B

Have less interest-rate risk than bonds with smaller coupons C

Have lower duration than smaller-coupon bonds D

Both B and C Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

A lower coefficient of variation implies: A

The value in a set are relatively less dispersed from the mean and hence less risky The value in a set are relatively more dispersed from the mean and hence less risky The value in a set are relatively more dispersed from the mean and hence more risky None of the above is true

Sumit invested in Morgan Stanley Dynamic Equity Fund which has a standard deviation of 15% and in Meril Lynch Top 100 Equity Fund which has a standard deviation of 10%

The two funds have a perfectly negatively correlated

What weights of both the funds will eliminate all the portfolio risk

When will be the investor’s risk reward trade off better

With lower coefficient of variation With Higher coefficient of variation With coefficient of variation equal to 1 None of the above is correct

Calculate the beta of a security with the help of the following details

of market= 18% Coefficient of correlation= 0

Calculate the yield on a long term corporate bond having some probability of default if its bond default premium and the return on long term government paper are 0

37% and 10

Which of the following best describes the coefficient of determination

It is % age of risk explained by the market B

It is % age of total risk explained by the market C

It is % age of unsystematic risk explained by the market Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

It is % age of diversified risk explained by the market A

Sometimes larger than the arithmetic mean for stocks 161

Which statement is true with regard to risk free rate

The risk-free rate is the maximum return an investor expects from any investment

The risk-free rate is the return an investor expects to earn from investment in t-bills

The risk-free rate is the rate one earns on the investment in equities

None of the above

The total return for a 12% semi annual coupon bond purchased at 1005,

held for six months and sold for 1050 is A

The total return on a bond purchased for Rs

-10% 1%

A perfectly diversified portfolio will fully eliminate ___________risk

Systematic B

Unsystematic 165

The return relative for a stock bought at Rs

For a U

S investor purchasing a foreign stock,

The foreign currency depreciated 4 % against the dollar

The return to the U

investor after currency risk is accounted for is A

0016% 2%

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

D A C A B D'D A D'B D'D A D'A A C B C D'D A B B A C C D'B A B B D'B B A D'B D'B

D D'D C A A B C A D'D B D'D C A A D'A B B A A A B A B B C B B A C A A A D'C B B

Answer Sheet Unit 1 81 C 121 82 B 122 83 B 123 84 A 124 85 B 125 86 A 126 87 C 127 88 C 128 89 C 129 90 D'130 91 C 131 92 C 132 93 B 133 94 B 134 95 A 135 96 B 136 97 B 137 98 C 138 99 A 139 100 A 140 101 D'141 102 D'142 103 C 143 104 C 144 105 A 145 106 C 146 107 A 147 108 C 148 109 B 149 110 D'150 111 B 151 112 C 152 113 C 153 114 B 154 115 A 155 116 B 156 117 A 157 118 C 158 119 B 159 120 D'160

B C A C D'A C C B A D'B A B A D'A A D'D A D'B D'B A C A B C D'B B C A B D'A A B

B C A B A B C D'B D'B D'A C A A D'A A

A D'D A A C C C D'A C

C A D'D D'A B A C C D'C A C A C C A

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

Solution 7: The market risk premium is the additional return for accepting the risk of the market

If the market premium increases with all else remaining the same,

then the price of the stock would have to decrease

An increase in the market premium would also increase the discount rate used to value the stock

This higher discount rate will cause the present value of the cash flows to be smaller

Solution 8: Answer is option A

Non-diversifiable risks or systematic risks are those that affect the entire market,

Solution 9: Answer is option D

ADRs are used to trade foreign securities in the U

ADRs are foreign shares denominated in U

dollars and do not eliminate currency risk

Solution10: Answer is option B

Systematic risk cannot be eliminated,

Beta only measures systematic risk

All other statements are true

Solution 11: Answer is option D

Mortgage–backed securities are subject to the same risk as bonds plus the risk of prepayment Solution13: Answer is option A

A longer-term bond will be subject to more inflation risk

Since the quality of the bond is high,

the level of default risk is low

Solution 15: A retiree at 60 has little appetite for risk as he no longer has any earning power

Further,

But a small amount of equity is still recommended as a hedge against inflation

If not,

he will experience a drop in his standard of living

Answer 18: A change in the coupon payment from annual to semiannual will result in the coupons becoming more significant compared to the final payment on a weighted average basis and decreases the duration of a bond

All other factors will increase the duration of a bond

Solution 19: The only answer that does not contain II

An increase in the dividend growth rate leads to an increase in the stock price Solution 38: Beta only captures systematic non-diversifiable risk of a security

Therefore,

I False II True,

III True,

IV False

Investors form portfolios to eliminate non-systematic risk Solution 42 : Standard deviation of portfolio: бAB=[бA2W A2+бB2W B2+2W AW BрABбAбB]1/2 = [(8^2*0

60^2)+2*

Panipat

Return on equity = 15

50 = Rs

/Mean*100 =3/15*100 = 20% Solution 59: Portfolio Return= (0

50*19) +(0

35*12)+( 0

84 =211

68/324 = 0

37 = 10

Equity risk Premium (ERP) = Return on equity-risk free rate = 15-7

Amount Weights Invested Rs

4,00,000 0

3,00,000 0

Indicative Returns 28% 25%

Volatility

Maximum Return(Mean+3SD)

Minimum Return(Mean3SD)

12% 10%

64% 55%

1,00,000 0

2,00,000 0

Maximum Possible Return Minimum Possible Return

4x64)+(0

3x55)+(0

2x59) = 54

75% = (0

4x-8)+(0

3x-5)+(0

Panipat

Solution 73: No

of co-efficient of covariance terms = n (n-1)/12 = 20*19/2=190 Consider an equity mutual fund with an expected return of 15% and an expected standard deviation of 18%

The risk-free rate is 5%

The expected return on the market index is 16%,

and its standard deviation is 20%

An investor wishes to place 60% of her funds in the mutual fund and the remainder in riskless assets

Using this information,

Solution 74: Standard Deviation of portfolio = бAB = [бA2W A2+бB2W B2+2W AWBрABбAбB]1/2 But,

so Coefficient of correlation is also zero Therefore,

Standard Deviation of portfolio = 18x0

60^2)+2*

= Mean + 3 SD = 22+3x8 = 46% = 18+3x5

5% = 46x0

Solution 90: Note: Price = Dividend / (rate of return – rate of growth of dividend) Next year dividend = 3

85 * (1

1195 / (r-

Panipat

Solution 98: Solution: M

V of a Stock=[(Dividend*(1+growth rate)] / (Return- growth rate) Solution 104: Answer is option C

Of all the choices,

only unexpected corporate earning growth would have a significant positive impact on the value of a stock

Under the Efficient Market Hypothesis,

any expected changes would already be reflected in the price of the common stock

Unexpected increases in inflation would increase the discount rate and reduce the value of the fund

Solution 107: Arbitrage Pricing Theory uses multiple regression (many factors) to determine a model or formula that has numerous factors

This model is then used to determine the value of a security

The CAPM is based on the single factor of Beta,

which measures the level of systematic risk within a portfolio

Solution 110: Answer is option D

Statement #4 is false,

because if the cost of capital is less than the IRR,

then the project should be accepted (NPV > 0)

Solution:116 N =4 I=Solve =23

nper= 72/ rate of compounding,

Solution 121: CAGR = [{(End Value + Dividend Received/Begin Value)^1/No

of years}-1] x100 CAGR= [{650/120) ^1/10}-1] x100 =18

Arithmetic Mean =

Panipat

Solution 134: 23=12+35+(x)-5-13/5 X= 86% Return for year 2005 = 86% Solution 135: Real Rate of Return = [1+I/1+E]-1x100 1

0185 E = 1

05 =1+I/1

07 1+I = 1

Solution 137: Tax Adjusted Real Rate of Return = [1+ {I (1-T)}/1+E]-1x100 1

04 = 1+ [0

06 = 1+ [0

12(1-T)] 1

1024-1 = 0

Calculate the return generated by the investment in the year 2007

Solution 144: Geometric Mean = (0

093)^5 = 1

55991/1

249668 =1

2482 or 24

Solution 146: Real Rate of Return = [1+I/1+E]-1x100 =4

Panipat

Arithmetic Mean = (End Price + Dividend)-begin Price/Begin Price = (250+100)-230/230=52

Solution 152: (1

77 R = 1

0058 = 1

6752 or 67

Geometric Mean = (0

Solution 154: HPR = (900+10)-800/800=0

1375 or 13

Arithmetic Mean =

Solution156: Formula: Approximate yield = annual income+ future price-current price No

of years Future price + current price 2 Solution 159:

Expected Value = (10x0

2) + (20x0

Solution 162: Return = 45+60=105 % Total Return =105/1005x100=10

-1/38=-0

On sale of security) =48x0

84% A U

investor buys a French stock when the value of the franc stated in dollars is $0

The cost of the stock is 250 francs

One year later the stock is at 300 francs,

and the stock paid a dividend of 10 francs

The francs is now at $0

Answer the next two questions

Solution 167: HPR = (End Price +Dividend)-Begin price/Begin Price 0

Panipat

Solution171: Rationale: A higher Sharpe measure than a passive strategy is indicative of the benefits of active management

Solution 173: Treynor Measure =7

Solution 180: Rationale: A portfolio with a positive alpha is outperforming the market

If this portfolio also has a low degree of nonsystematic risk,

the portfolio is adequately diversified

Solution 181: Rationale: A purely passive strategy uses only index funds and keeps the proportions constant when there are changes in perceived market conditions

Solution 182: Solution: Realized Return

19 – 0

47826 = 0

Answer is C Solution183: Answer is option D,

unless the correlation coefficient bet ween the stocks is equal to one,

the standard deviation for the portfolio will be lower than the weighted average standard deviation for the portfolio

Solution 184: Answer is option D

Sharpe uses standard deviation and Treynor uses beta Solution 185: Rationale: The Sharpe measure is commonly used to measure the performance of professional managers

A good manager has a steeper CAL than the one from following a passive strategy

Solution 186: Jonson’s Measure=17

the Treynor Index uses beta as its risk measure Solution 190: By definition,

as the stocks are positively correlated,

they move in the same direction but Stock B will move three quarter as much as Stock A Solution 191: Calculations are as follows: (2

1) + (5

1)^2 + (6

1)^3 – 8

the most active portfolio management strategy consists of engaging in both pursuits

Solution 194: A purely passive strategy is one that calls for no market analysis

Solution 201: (7x0

2) + (12x0

3) + (20x0

15) + (5x0

35) = 9

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

Unit-2 Investment Vehicles 221

A security will not earn the yield-to-maturity that was promised when the security was purchased if which of the following conditions occurs

The issuer defaults on either the interest or principal payments

The investor sells the security prior to its maturity date

Cash flows from the security paid to the investor prior to its maturity date are held in cash or spent on consumption goods rather than reinvested

All of the above are true

Which one of the following products is designed to provide both growth and income

Fixed premium annuity

Non-participating mortgage real estate investment trust (REIT)

Aggressive growth mutual fund

Convertible bond

Assuming that the current market yield for similar risk bonds is 8%,

determine the discounted present value of a Rs

which pays interest semiannually and matures in 17

5 years

Ruchi invested Rs

If the interest is compounded monthly at an annual rate of 4%,

what would be the amount that Rani would receive in five years time

Studies show that the Indian middle class has an excess of ______ as investments

Fixed Deposits B

Mutual Funds C

Equity Shares D

Real Estate 226

Mr Amit places his fixed deposit for one year with interest payable at maturity

Mr Sumit places his fixed deposit with another bank with interest payable quarterly

Assuming that the deposit amount is Rs

100,000,

and using the same annual rate of 6%,

what is the difference in future value after one year

Panipat

Which of the following is CORRECT regarding zero-coupon securities

They eliminate re-investment rate risk

The yield to be earned on them cannot be determined until these securities are held to maturity They are only issued by corporations

They offer minimum price volatility

The yield to maturity on a bond A

Is a promised yield B

Is calculated by assuming that investors reinvest all coupons received from a bond at a rate equal to the computed YTM on that bond C

Is a measure of the true yield that a bond investor is assured of receiving barring D

Is almost always equal to the realized compound yield 305

When calculated for a period of,

the Realized Compound Yield consists of A

The coupon income The price change The coupon income+ the price change The coupon income+ the price change the interest-on-interest

Choose the INCORRECT statement in the following set of statements about bond measures

The yield to call is a promised yield The current yield is equal to coupon divided by current marker price

The horizon return is an expected return The YTM is both a promised return and a realized return

An increase in reinvestment rate risk A

Is caused by an increase in interest rates

Leads to a decline in coupon rates

Results from a decline in interest rates

Results from an increase in inflation

If bond investors do not reinvest the coupons received during the life of the bond,

Promised yield will be less than the realized yield

Promised yield will exceed the realized yield

Nominal yield will be greater than the promised yield

Current yield will equal the promised yield

With regard to the various yield measures on bonds

The yield to call is often a better measure than YTM for bonds selling at a premium Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

The realized compound yield takes into account all intermediate cash flows and reinvestment rates C

The yield to maturity is the compound rate of return an investor will receive if the bond is held to maturity D

A and B are correct 310

A bond of face value of Rs

similar bond in market yield 8% what is pv of the bond

A bond of face value of Rs

similar bond in market yield 8% what is PV of the bond

41 b) 982

42 c) 983

A bond of face value of Rs

similar bond in market yield 9% what is PV of the bond

Amit buys 200 convertible debentures of TISCO at Rs

200 each

Amit exercises his options after 4 yrs and receives 100 shares

Compute cost of acquisition of each share

300 467

Under fundamental analysis,

a security is considered attractive for purchase if its computed intrinsic value is A

Less than its current price Greater than its current price Less than its book value Greater than its book value Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

Namit buys Wealth Enterprises for Rs

He expects the firm’s earnings and dividends to grow at an annual rate of 7%

The firm expects to pay a dividend of Rs

The market risk premium is 8%

Namit expected rate of return is A

10% 12% 12

35% 15%

Onyx wealth solutions Ltd

It is expected to have a constant growth rate of 7% per year

The risk free rate of return is 6%,

the market risk premium is 8%,

and the beta for this company is 1

The stock price is A

Choose the INCORRECT statement concerning the DDM: A

It is based on the position that the price of a stock is the discounted value of all future dividends B

Not all of its three growth rate cases involve a present value process C

The no growth rate case is the least likely case to be encountered D

The multiple growth rate case involves at least two different growth rates 471

Using the constant growth version of the DDM to determine the intrinsic value of a stock A

The formula calls for the dividend to be paid this period The required rate of return is expected to be larger than the growth rate in dividends There is no present value process involved in the simple equation used in this case The answer obtained from this equation is the definitive value for the stock for all investors

Which of the following statements is INCORRECT about dividends

Dividends are the foundation of valuation for common stocks B

The DDM states that the value of a stock is the discounted value of all future earnings C

The DDM is operationalized by estimating the expected future dividends to be paid by a company and estimating the required rate of return D

The answer obtained from this equation is the definitive value for the stock for all investors 473

With regard to markets,

choose the CORRECT statement: A

Secondary markets exist for the trading of new securities Investment bankers often underwrite new issues by purchasing the securities If the issuer is selling securities for the first time,

these are referred to as seasoned issues All secondary equity markets are auction markets

You instruct your broker to sell your existing shares at a price that will assure you of receiving at least Rs

This is which type of order

? Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

A market order A limit order to sell A stop order to buy A stop order to sell

An investor buys 100 shares of a stock at Rs

The stock goes to Rs

Ignoring all costs of transacting,

the percentage return on investment is A

If the initial margin requirement is 60 percent,

Can purchase 125 shares Can purchase a maximum of 100 shares by borrowing Rs

Can purchase 80 shares Can purchase 200 shares by borrowing Rs

You sell short 100 shares of stock at Rs

If the stock moves to Rs

A loss of Rs

What is the sum of a series of future cash transactions on a present value basis

Discounted Cash Flow Time Value of Money Adjusted Present Value Annuity

Suppose you invested an equal amount of money is Gold and Real Estate at the same point of time and soon the economy enters into depression

Which investment will pay you better

Real Estate Gold Both will give the same returns All the options are incorrect574

Physical settlement in a commodity futures market involves the delivery of: Profit Future Contract Underlying Commodity None of the above

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

D D'C B A D'C D'A B A D'C C B C D'A A B B D'A C C D'C D'B C A A B A C C C C

Answers Unit 2 B C D'B C D'C A D'C B C B D'D D'A C C D'B A B A B A A B C A A A C D'D D'B C

C D'D D'D A D'B A A B D'C C A B B A B A C B D'C D'C B D'B A C B B D'A C C D

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

A A A C B B A A C B D'A B B B B D'B C D'A D'B B B C D'C D'B B A B A D'D A B

C C C B A C A C A B C B D'C A B C B A B A D'C A D'B A B B D'D B A C A B D'A

Answers Unit 2 C D'C C B B A D'D A D'C A B B D'C B D'A D'D A B C C C B C C D'A B C C B B B

C D'B A A D'C C C C C D'A A D'D B D'B D'A C D'C C C A C A B B B B B B B A B

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C C B A C B D'C B A A C A A D'A D'C C D'A A C A B A B D'B D'D D'A C D'A D'A

Answers Unit 2 D'546 B 547 B 548 B 549 A 550 A 551 C 552 C 553 B 554 D'555 D'556 C 557 C 558 B 559 C 560 B 561 D'562 B 563 B 564 B 565 C 566 D'567 D'568 B 569 C 570 D'571 D'572 A 573 D'574 B B D'C D'C D'D B

C A C A C D'C A D'C B C A A D'C C B D'B B C B A A B A B C

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Options “A” & “B” provide income only and Option “C” is designed for growth

06) = 136

PV=-810 268

I=Solve=9

N=3*2=6 PMT=4

N=3*2=6 PMT=4

FV=1000 I=5

0928*2=10

2955*2=10

Duration is approximately equal to the point in years where the investor receives half of the present value of the bond’s cash flows

Therefore the later the cash flow are received,

The longer the time to maturity,

the greater the duration (and vice versa)

A longer-term bond pays its cash flows later than a shorter-term bond,

The lower the coupon rate,

the greater the duration(and vice versa)

A lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration

The lower the YTM,

This is because the bond’s price (or present vale) is inversely related to interest rates

When market yields fall,

the value (or cash flow) of a bond increases without increasing the time to maturity

PV=Solve=-835

I=8 PMT=60

FV=1000

Duration is a present value,

time weighted measure of payback

All of the factors listed are important components in determining duration

N=15*2=30 PMT=0

I=9/2=4

Panipat

321 CMPD

PV=-400

I=Solve=7

934 PMT=0

FV=1000

All other factors will increase the duration of a bond

the calculations are as follows: R = Risk free rate + risk premium Div1 = Div x (1 +g) P = Div1/(R – g) Where P = price Div1 = dividend in year 1 R = required rate of return or discount rate g = constant dividend growth rate R = 0

05) = 8

4 P = 8

13 – 0

bond with a longer maturity will be more sensitive to changes in interest rates

All else constant,

a bond with a lower coupon will have greater interest rate risk

The statement that a bond’s percentage change in price and dollar change in price are both tied to the underlying price volatility is true

The effective duration formula result is for a 1

47/100*98

63*2=-10

I=Solve=12

PV=Solve=-871

PV=-871

FV=1000

FV=1000

N=5 Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

Panipat

I=Solve=9

PV=Solve=-935

FV=1000

FV=1000

of premiums paid X sum assured /No

of premium payable + bonus if any

Surrender value,

Paid-up value X S

Paid-up value: 20 X 1,

000 + 84,

700 per 1,

A) = Rs

Therefore surrender value is Rs

therefore the intrinsic value is zero

The premium of an option does not affect the intrinsic value of the option,

hence (a) 368 Unit purchased for dividend Total units held

=3/21=0

1428 =1

End Value

1428*22=25

Balanced Fund,

Growth Fund and Small Cap Fund

A small cap fund is more risky than a growth fund

Earnings of smaller companies are more exposed to the vagaries of the economic cycle

Answer the next 2 questions

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5)/28 = 24

143=10943

Treasury bills,

banker’s certificates of deposits and bank acceptances

As the instruments are highly liquid,

usually no notice for withdrawal is required

In fact,

some money market funds provide quasi checking facilities

Money market funds can pay current income as the instruments mature in the short term

It should also be mentioned that money market funds have low interest rate risk because of the short tenor of the instruments

II There is no need for the manager to repurchase units

IV Redemptions do not affect a close end fund

The number of units stays the same

the investor made identical returns from both funds: Rs

There is a misconception that a lower priced fund has a higher return

I is true

02 = 3921

58 = 6896

which leaves a profit of Rs 400

Rs 3000 is the premium paid for put option

Value in put option is 19500 – 17500 = Rs 2000

Which leaves the call writer with the profit of premium collected i

of shares =10163934 Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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Market price is twice the book value so it is 100

85 * (1

1195 / (r-

85 * (1

1195 / (r-

the intrinsic value of a share of common stock is equal to the discounted present value of its cash flows

This model is then used to determine the value of a security

The CAPM is based on the single factor of Beta,

which measures the level of systematic risk within a portfolio

If the market premium increases with all else remaining the same,

then the price of the stock would have to decrease

An increase in the market premium would also increase the discount rate used to value the stock

This higher discount rate will cause the present value of the cash flows to be smaller

02 d1 1

12 – 0

04) = Rs

the stock is underpriced in the market

Tom should purchase the stock

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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Above the line would indicate a higher than expected return for the given risk level

On the line would indicate an expected return for the given risk level

Below the line would indicate lower than expected return for the given risk level 425 Solution: Answer is option C

This is a question regarding the constant dividend growth model for determining the value of a stock

The following formula is used for the constant dividend growth model: P0 = D1/k – g where: P0 = Price for the security

D1 = The dividend paid at period 1

k = The investor’s required rate of return

G = The growth rate of the dividends

Therefore,

Book Value = Net Worth/No

of Equity Shares = 4700000/200000

Panipat

26x100=4

V of a Stock=[(Dividend*(1+growth rate)] / (Return- growth rate) 440 Solution: PV = Rs

FV = (Rs

12 – 0

04 = Rs

g = growth rate 443 Solution: 13*3 = 39 + 1*5 = 44

44/4 = Rs

5992 4=2

963 NPV=5

14078/0

18^3=15

6023=21

65375/0

5375-15

Price of Stock = D1/ (re- g) = 2 x 1

Panipat

Price of Stock = D1/ (re- g) G=

I = Solve = 8

00 PV =

08) = 1

07 = 15

07 = 39

Price of Stock = D1/ (re- g) = 1

069 = 17

5475/19=8

Price of Stock = D1/ (re- g) = 1

07) = 1

07 = Rs

Panipat

Price of Stock

40 = 2/ (1

15-g g = 1

Price of Stock = D1/ (re- g) = 20/ 1

10 = Rs

85(8) = 12

Price of Stock = D1/ (Ke- g) = 1

07 = 25

65 Price=1

50 EPS=1

so EPS=Dividend paid Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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07 re = 0

0(8) = 14

Price of Stock = D1/ (re- g) = 1

07 = 18

Margin Paid=200*100*0

60=12000

Profit=20*100=2000 Return on Investment=2000/12000*100=16

67% 476

Investors can buy securities worth Rs

Maximum Shares investor can buy=5000/50=100 shares Loss per share=180-150=30 Total Loss=30*100=3000 479 Solution: A call option has unlimited price potential which means that writing a call without the stock as a hedge will provide the greatest loss potential

Statements #1,

Statement #4 is false because tax swaps generally take advantage of capital losses by selling bonds,

which have been devalued by increasing interest rates

The exercise price for a put is the price at which you can sell the stock

Selling a call option will allow her to generate income from the option premium with little risk since she does not expect the stock to continue to increase

If the stock does exceed Rs

she would be paid what she wants for the stock Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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Generally,

investors evaluate performance of investments based on risk adjusted returns

Therefore,

A and B must be wrong since they only address one aspect of the risk-return relationship

Treynor and Sharpe ratios are performance measures in which the higher the ratio,

the better the risk adjusted return

No calculation is needed for this question

D'is the only reasonable answer

It is the only one that indicates that a fund should be chosen,

because the performance measure is high (not low)

of shares that can be bought=2000/16=125 491 Margin Required=100*16

2500 504

Return %=15000/1500*100=1000%

(16,000)

Panipat

Option income is Rs

Net value is

100=100

Amount received on expiry of the contract

Therefore,

No Profit No Loss 535 Time Value=Premium-Intrinsic value =100-0=100 537

Premium Received on writing the call=Rs

Loss at expiration date

Therefore,

No Profit No Loss 542 Mr

Dinakar shall sell Nifty Futures of Rs

00,000*1

He should sell nifty futures to the tune of Rs

= Call Premium – Intrinsic Value = 3-2= Re

Panipat

20% + 5

45% + 6

00%)/3 = 5

15,600/0

0522 = Rs

Panipat

7254*12=8

Press CMPD N=10*12 I=Solve=0

3071*12=3

Statement #1 is true

It is not necessary to have negatively correlated assets

it is only necessary to have assets that have a correlation less than positive one (+1)

Statement #3 is false,

because diversifying across asset types is more,

effective than within an asset type

Statement #4 is false,

because all the input variables in statement #1 help to create the efficient frontier

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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Unit-3 Investment Strategies 575

Value investing involves purchasing stocks with __________ A

Low P/E Ratios B

Low Book Values C

Low Dividend Yields D

Low Margin of safety 576

Asset Allocation means_____ A

Practice of allocating investments in different equities B

Practice of dividing resources among different categories of assets for generating optimum profit with lesser risk C

Practice of trading shares,

All of the above 577

What are the reasons that one should opt for an asset allocation policy

Minimize the risk Maximize the profit Diversify one’s investment All of the above

Which of the following statements concerning technical stock market indicators is/are correct

The stock market is considered strong when the volume of the market is increasing in a rising market

The market's direction will change when the percent of odd-lot short sales significantly increases or decreases

Prices crossing the moving average line would be an indication of the change in the market

1 only B

Which of the following is a feature of Insured Asset Allocation

One can establish a base portfolio value below which the portfolio should not be allowed to drop

As long as the portfolio achieves a return above its base,

If the portfolio should ever drop to the base value,

one should invest in risk-free assets so that the base value becomes fixed

All of the above 583

Dynamic Asset Allocation policy works better when: A

The market is moving up only Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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The market is moving down only C

Option A & B D

The market remains constant 584

An investor desired rate of return is 8%

If it is assumed that the stock will return 10% p

? What should be the strategic asset allocation of the client

Namit’s investment portfolio comprises Rs

Over one year the returns on equity and debt are 5% and 12%

At the end of the year to maintain his current asset allocation,

Do nothing

He needs to move Rs,

He needs move Rs

He needs to invest Rs

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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Answers Unit 3 575 A 576 B 577 D'578 B 579 C 580 C 581 D'582 D'583 C 584 B 585 C 586 A 587 B 588 B 589 A 590 B 591 C 592 C 593 B 594 D

Roots Institute of Financial Markets 1197 NHBC Mahavir Dal Road

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Unit-4 Regulation of an investment advisor 596

SEBI is the Regulator for _____________ companies A

Listed B

Unlisted C

Both A and B D

Foreig