703/B, Jayanand Cmplx, Jhawkar lane

Sion-Chunabhatti Mumbai-22
9324352048
F1fx@aol.in
Fax: 022-22065436

F1fx_facilitate learning
I-Time value of money

Ashok has come across two projects, each with a 12% required rate of return and
under given cash flows.

Project A Project B

Initial cost Rs. 15,000 Rs. 20,000

Life 5 years 4 years

Cash inflows Rs. 5,000/year Rs. 7,500/year

1.If the projects are independent, you would advise Ashok to:

A) reject both projects.

B) accept Project A and reject Project B.

C) reject Project A and accept Project B.

D) accept both projects.

Ans as both the projects are giving more than the required rate i.e. 12%

2. Using the above data if the projects are mutually exclusive, you would advise
Ashok to: (4)

A) reject both projects.

B) accept project A and reject project B.

C) reject project A and accept project B.

D) accept both projects.

Ans: As project A is giving comparatively lower returns than project B

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3. NPV is calculated in the case of a series of _______cash flows. 1

A Uneven.

B Even

C Zero

D Single

Ans: As for even cash flows Compound formula for annuity would be
easier

4.Mr. Rajeev is 45 years old and working as Vice President in a Multinational

Bank. He is earning Rs.62000 net of taxes. He spends Rs.30000 every month. He
is going to get an increment of Rs.5000 in the month of September. He wishes to
increase his standard of living by 2% every month for one year. His assets are as
follows:

Rs.

Liquid Assets 225000 (Cash at Bank is Rs.120000)

Other Financial Assets 1830000

1.Calculate Expanded Liquid Asset Coverage Ratio and prepare cash flow
statement for next 3 months. We are in the Aug, 2007.

Ans: Expanded Liquid Asset coverage ratio

=liquid Asset + .5(other financial assets) +Fixed deposits/Monthly expenses

=225000+.5*(1830000)/30000=38

Cash Flows for 3 months

Cash Flows August September October

Inflow

Bank bal c/f 120000 152000 188400

Salary 62000 67000 67000

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Total 182000 219000 255400

Outflow

Expenses 30000 30600 31212

Total 30000 30600 31212

Bal c/f 152000 188400 224188

5. Debtors turnover ratio is 13.06, credit of 30 days, is

a. good

b. bad,

c. average

d. data insufficient.

Ans:Debtors turnover ratio signifies the times sundry debtors turnover

during the year
Higher the ratio better it is (industry avg is 7.5)
Good credit management.
Credit given for 30 days is good (less than 40 days qualifies as good)
Average collection period=365/(debtors turnover ratio)= 365/13.06=27.94

6.What will bring about a change in the networth of the client ;

a.He repays home loan from savings account

b.He buys a vehicle 75% financed and 25% down payment

c.Nifty goes up-client has Nifty Index Portfolio

d.Interest rates fall—client has substantial bond holdings

Ans:a will decrease the liabilities but the assets(savings Account ) will also
decrease

7.Cash in Hand Rs. 10,000.

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Bank balance Rs. 30,000 (Ashok), Rs. 20000 (wife’s name).Money Market Mutual
Fund Rs. 2,00,000 (Ashok)Monthly expenses 40000/Comment on the Basic
Liquidity Ratio for the couple?

A) 3.25, not sufficient

B) 1.5, not sufficient

C) 6.5, Sufficient

D) 6.5, Liquidity is more then required and he is advised to shift 50% of

his liquid assets to Debt/Equity Assets.

Ans Basic Liquidity Ratio=Cash +Bank bal+ Liquid Assets/monthly expenditure

=10000+ 30000+20000+200000/40000

=260000/40000

=6.5

Ans: Basic liquidity ratio is simply the index for survival without income & the
standard BLR lies between 3-4 months & even the extended liquidity ratio is for 6
months.

8.Reciprocal of P/E ratio, E/P ratio measures___________ 1

A Market price of a share

B Growth ratio

C Cost of debt

D Opportunity Cost of capital

Ans: On investment at a particular price one can expect x as earning &

this ratio is nothing but the opportunity cost of capital

III -Portfolio Risk & Return

9. Security A has a standard deviation of 23% and the market has a standard

deviation of 18%. The correlation coefficient r between Security A and the market

is 0.80. What is the % of the change in Security A can be explained by changes in

the market?

A 80%

B 50%

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C 36%

D 64%

Ans: When correlation between a security & market is .8 (positive co-rrelation),it

signifies that on every 100 units of change in the market the particular security
will change (in the same direction, either +ve/-ve) by 80 units.

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

i) Standard Deviation of X is 10%

ii) Standard Deviation of Y is also 10% and covariance between them is 16%,

what is the portfolio risk?

Wx=70, Wy=30

SDevx=10%,SDevy=10% & cov=16%

Portfolio risk/Stddev={(wx^2*varx^2)+(wy^2*vary*2)+2 *wx*wy*Cov}^1/2

A 8.04%.

B 13.77%.

C NIL

D 25%.

11.Mrs Priyanka Chaudhuri has received Rs.500000 as incentive from employer

and is planning in invest in the following shares whose probability of returns is
given below:

Amount of investment Returns Probability

ABC 500000 12% 0.10

18% 0.30

20% 0.20

-10% 0.15

-8% 0.05

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 -12% 0.10

16% 0.10

-------------

1.00

1 Calculate Expected Return on the stock.

9.80%

9.10%

12.10%

None of these

2 Calculate Standard Deviation of Returns?

12.922%

12.854%

11.782%

None of these

3 Is it prudent for him to invest the entire amount in one stock?

Yes, if he feels prospects for that stock are good.

It is advisable to diversify his investments in different sectors

It depends on the financial soundness of client, Rs.500000 may be a small

amount for him

Any of the above

4 If 30% probability is there for the stock to give a return of 19%, what will be
the expected return from the stock and standard deviation?

9.1% and 13.345%

9.4% and 13.135%

9.8% and 12.987%

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None of the above

12.The returns of two assets under four possible states of nature are given
below:

State of nature Probability Return on Return on

Security A Security B

1 0.10 15% 10%

2 0.30 12% 8%

3 0.50 16% 13%

4 0.10 18% 14%

1 What is the expected return on Security A and Security B?

14.9% and 11.30%

15.6% and 12.50%

14.5% and 12.65%

None of these

2 What is the Expected Return on the portfolio if weight of Security A and

Security B is 55% and 45% respectively?

14.20%

13.28%

12.98%

None of these

3 What is the standard deviation of the returns on Security A and Security B?

2.022% and 2.368%

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2.056% and 2.678%

2.304% and 2.305%

None of these

4 What is the covariance between the returns on Security A and Security B?

4.978

4.625

4.723

None of these

5 What is the coefficient of correlation between the returns on Security A and B?

1.000

0.966

0.978

0.987

6 If Security A and Security B are perfectly negatively correlated, what should be

the weights of A and B that will derive standard deviation of portfolio to zero?

49.45% and 48.45%

50% and 50%

53% and 47%

None of these

13.Mr. Jha has invested in a portfolio of Securities called ABC which can be
compared to a market portfolio called “Market”. The market portfolio has an
expected return of 18% and standard deviation of 23% and the risk free return is
8% p.a. Beta of Portfolio ABC is 1.12. Standard Deviation of portfolio ABC is 20%.
You are requested to answer the following questions.

1 Calculate Slope of Capital Market Line or Price of Risk in the market?

0.4376,

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0.4323,

0.4347,

0.4567

2 Calculate Fair return on portfolio ABC as per Capital Market Line (CML)

15.567%

14.789%

16.694%

None of these

3 Calculate the Fair return as per Security Market Line (SML).

19.20%

18.89%

19.80

None of the above

14.Consider the following information for three Mutual Funds, A, B and C and the
market.

Name of the fund Mean Return Standard Beta

Deviation

A 12% 18% 1.10

B 10% 15% 0.90

C 13% 20% 1.20

Market Index 11% 17% 1.00

The mean risk free rate is 6%

1 Calculate Sharpe ratio for A, B, C and Market

0.333, 0.267, 0.350, 0.294

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0.267, 0.333,0.294, 0.267

0.333, 0.350,0.267, 0.294

None of the above

2 Calculate: Treynor ratio for A, B, C and Market.

5.83, 4.44, 5.45, 5.00

5.67, 4.56, 5.78, 5.00

5.45, 4.44, 5.83, 5.00

None of the above

3 Calculate Jensen ratio for A, B, C and Market.

0.5, -0.5, 1.0, 0

-0.5, 0.4,1.2,0

0.3, 0.5,0.6,0

None of the above

4 What is alpha of Fund C?

0.5

1.4

1.0

1.2

15.Which of the following is non-diversifiable risk?

business risk

management risk

company or industry risk

market risk
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interest rate risk

purchasing power risk

456

123

562

134

IV-Equity Valuation

16.Mr. Sahni has planned to invest in an Infrastructure Company’s equity share

as well as debt issue a sum of R.250000. He has approached you with the
following information:

The company has paid Rs.5 per share as dividend this year. In the next 2 years
the company is expected to grow its dividends at a rate of 10%, in the third year
company is expected to grow at 9% and after that will grow at a constant rate of
7% p.a. Mr. Sahni expects a return of 14% p.a. from this stock. He has also
invested in deep discount bonds of this company and has paid Rs.125000. He will
get Rs.200000 after 5 years. This amount he will utilize for buying a second hand
car after 5 years. Shares of the company are available in the market at Rs.85 per
share.

1 What is the intrinsic (Historical) value of share of the company?

81.96

84.57

83.89

82.67

2 Find out whether the share is undervalued or overvalued. Should a value

investor select this share for his portfolio?

Undervalued, Yes

Overvalued, No

Overvalued, Yes

Undervalued, No

3 If Mr. Sahni is optimistic about the growth prospects of this company, what do
you recommend him about the purchase the shares?

Yes, difference as per intrinsic value and market value is not much

He may buy as he is optimistic about the growth of the company

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If he is a value investor, he should look for undervalued shares

All of the above

17. According to the fundamental analysis, which phrase best describes the
intrinsic value of a share of common stock?

The par value of the common stock

The book value of the common stock

The liquidating value of the firm on a per share basis

The stock’s current price in an inefficient market

The discounted value of all future dividends

V- Bond Valuation

18.Mr. Mehta is a very conservative investor. He puts all his money into debt
securities of various companies viz. RBI Bonds, PO Schemes, Bonds and
Debentures of companies. He has invested Rs.100000 in a Bond of AB Company 3
years back. The Bond has tenure of 10 years. This Bond pays coupon @10% p.a.
semi-annually. He wishes to sell this bond now when market interest rate has
become 8% p.a.

He has also invested in the Bonds of XY Company 5 years back with call option
after 5 years. Bonds had a face value of RS.100000, coupon rate 12% p.a. Bond
has been actually called back after 5 years and he has yesterday got a letter from
XY Company regarding the same. Company has decided to give an appreciation
of 5% over Face Value at the time of redeeming Bonds.

1 At what price can he sell the Bond of AB Company?

Rs.110879

Rs.110563

Rs.100678

Rs.101012

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2 If YTM increases to 12% from present 8% what will be the impact on Bond
price?

Rs.90705

Rs.91245

Rs.90805

None of these

3 If the Bonds of XY Company is called back, calculate Yield to call if market price
of the Bond is Rs.98900.

5.5338%

11.067%

11.098%

None of the above

19. If his Debt Portfolio consists of following:

Weight Return in %

0.10 8

0.20 9

0.15 8.5

0.15 9.5

0.30 10

0.10 11

Calculate Average return on his portfolio.

9.40%

9.86%

9.67%

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None of these

20.Ms. Ashima has invested in the bond and the following information is
available:

Face Value of the Bond: Rs.10000

Coupon Rate : 12% payable annually

Term To maturity : 6 years

Current Market Price : Rs.11000

1 Calculate Yield to Maturity on the Bond.

9.756%

9.7325%

9.7225%

None of these

2 What would be YTM if the same Bond pays coupon quarterly.

2.44%

9.77%

8.89%

None of the above

3 Calculate Duration of the Bond assuming the bond pays interest annually.

4.665 years

4.672 years

4.876 years

None of the above

4 If instead of 9.77%, YTM is 12% p.a. what will be the impact of this on
duration?

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Duration will come down to 4.6048 years

Duration will remain same

Duration will decrease as interest rate in the market has gone up.

Duration will increase to 7 years

21.A treasury bill of face value of Rs. 1,00,000/- is selling at Rs. 97,500/- today.
It is

slated to mature in 60 days. The annual yield is _______. 2

A 13.3%

B 15.59%

C 16.43%

D 14.27%

22.Rohan is an intelligent investor. He invests money after preparing proper asset

allocation in Equity, Debt, Cash and Real estate. He also believes in investing
through Mutual Fund route rather than direct investment in stock market. For
debt investments he prefers to invest in Bank FD, PO Schemes and RBI Bonds.
For equity he invested following amounts at different Sales prices.

Scheme Amount Invested NAV Entry Load

Rs. Rs.

A 25000 12.15
2.25%

B 35000 82.00 1.75%

C 50000 188.90
Nil

D 45000 75.89
2.00%

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1 What will be the Sales Price for A and Number of Units he will be issued?

12.4233 and 2012.3477

12.6978 and 1968.8449

12.2456 and 2041.5496

None of these

2 What will be holding period return (HPR) if he sells Scheme B at a repurchase

price of Rs.120.50 after two years of holding? Also calculate CAGR.

45.18% and 20.49%

46.17% and 20.90%

45.88% and 20.56%

None of the above

3 Calculate Sales Price for Scheme C and D.

188.90 and 77.4078

188.90 and 75.89

188.90 and 78.9002

None of the above

4 Calculate Number of units for Scheme C and D.

265.6903 and 582.2234

264.6903 and 581.3367

264.6903 and 581.7890

None of the above

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23.. Client invest 25000/- in a 5yr close ended fund. Fund collected 100crores.
Inititla issue expense 8cr. What will be the NAV when it opens.

24. An MF scheme can borrow money up to ___% of its Asset Under Management

for maximum ___ months. 2

A 30%, 3 months

B 30%, 12 months

C 10%, for any period

D 20%, 6months

25.The bid-ask spread is________.

1) Broker's commission

2) Dealer's gross income from a transaction

3) Larger for illiquid securities than for liquid ones. 1

A1

B2

C3

D 1, 2 & 3.

26 Mrs. Arora and Mr. Arora are aged 55 and 58 respectively. Both expect to live
up to 75 years of age. Their only goal is to fund their retirement. Which of the
following is an appropriate asset allocation strategy for them?

10% sectoral equity, 20% diversified equity, 30% long term debt, 40%medium
term debt

20% sectoral equity, 30% diversified equity, 50% long term debt

30% sectoral equity, 30% diversified equity, 40% cash/liquid fund

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 d) 70% long term debt, 30% medium term debt

VIII- Derivatives

27. Client bought shares of Reliance at 900/- 9 months back. Present price is
1760/-

Client is bullish on the stock. What should be his strategy :

Buy cal

Buy put

Sell put

Sell call

Reliance lot is 1500, 1740 call available at 60/-

1740 put available at 50/-

28.On 21st January 2008 one of Ravi.s clients had an open short position of 100
lots of Nifty futures, with an average price of Rs. 5699. On 21st January, Nifty
closed at Rs. 5208. But he did not square off his position until 22nd January 2008
when Nifty dipped to an intra day low of Rs. 4454. His position was squared off at
this lowest price. On 22nd January 2008 Nifty closed at Rs. 4912. The lot size of a
Nifty future is 50. What profit or loss was booked by Ravi.s client on his position?

A) Profit of Rs. 62.25 lakh

B) Loss of Rs. 62.25 lakh

C) Profit of Rs. 37.70 lakh

D) Loss of Rs. 37.70 lakh

29. During the recent period you feel that the stock market has shown a strong
bullish run. The Reliance Industry shares, which Ashok had bought for Rs. 900
per share about nine months back, are now at Rs. 1,760 per share.

He approaches you to guide him what strategy he should use. Lot size for
Reliance Industry is 150, CALL Option of Rs. 1,740 is available @Rs. 60, PUT
Option of 1740 is available @ Rs. 50.

A) Buy PUT option.

B) Sell PUT Option

C) Buy CALL Option

D) Sell CALL Option

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Priti wants to invest in XYZ Ltd's stock, however, she must wait several months

till her Fixed Deposit matures. What type of option should she invest in to protect

against the market value of the stock increasing before her money becomes

available? 1

A Buy a call option

B Buy a put option

C Write a put option

D Sell a call option

30. The risk of the writer of an option is _______. 1

A Market price at expiry

B Purchase price

C Limited by the premium

D Unlimited

31.The modern portfolio theory suggests that the portfolio returns can be
optimized

by _________. 1

A Laddering the bond portfolio.

B Investing in diversified equity fund s.

C Moving closer to the efficient frontier in terms of the risk return equation.

D Investing in treasury bills and equities.

32.Derivatives on gold related securities and government securities that are

traded on

the stock exchanges are regulated by _______. 1

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A SEBI

B RBI

C Department of Company Affairs

D Company Law Board

33.(A) Constant proportion portfolio insurance policy (CPPI policy) is the worst
policy if the stock market moves in only one direction, either up or down.

(B) Constant proportion portfolio insurance policy (CPPI policy) is the best policy
if the stock market moves in only one direction, either up or down. (1)

A) (A) is correct.

B) (B) is correct.

C) Both (A) and (B) are correct.

D) Both (A) and (B) are incorrect.

34.Principal vectors of an active portfolio strategy are: (1)

A) Market timing.

B) Sector rotation.

C) Security selection.

D) All of the above.

35) (A) For a Call option: Intrinsic Value = Spot price - Strike Price. Intrinsic
value must be positive or zero.

(B) For a Put Option: Intrinsic Value = Strike price - Spot Price. Intrinsic value
must be positive or zero.

(1)

A) (A) is correct.

B) (B) is correct.

C) Both (A) and (B) are correct.

D) Both (A) and (B) are incorrect.

36.A 28 year old bachelor earning well for his age goes to a CFPCM Certificant for
financial advice. He tells the Financial Planner that he does not want to look
beyond 2 years and all he wants is advise on how to maximise his returns. The
most appropriate action is likely to be:

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(A) Help him to invest in equity markets.

(B) Assist him in investing in debt instruments of appropriate maturity.

(C) Explain to him the risks of equity and debt markets. (2)

A) Only (C)

B) Only (B)

C) Both (A) & (C)

D) Both (B) & (C)

37.Security (A) has 12% return and 7% Standard Deviation (SD)

Security (B) has 18% return and 8% SD

A conservative investor should prefer _______________________. (2)

A) Security (A) since it has 95% chance of giving +ve return.

B) Security (B) since it has 95% chance of giving +ve return.

C) Security (A) has lower Standard Deviation.

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

38) Shyam opens his PPF account in the year 2001- 02. When can he make his
first withdrawal from this PPF

account? (2)

A) After 31-03-2006

B) After 31-03-2008

C) After 31-03-2007

D) After 31-03-2016

39.Shalu buys a call option of Infosys 2040 at Rs.35 and sells a call option of
2100 at Rs.15. The lot size of Infosys is 100. What is the Maximum profit for
Shalu? Ignore brokerage, STT, Service tax etc. (2)

A) Rs. 4000

B) Rs. 2000

C) Rs. 2500

D) Rs. 6000

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40) A company.s current dividend is Rs. 6. However it is constantly falling @ 5%
per annum. If the discount rate is

15% what is the value of its share? (2)

A) Rs. 63.00

B) Rs. 23.75

C) Rs. 28.50

D) None of the above.

41.The NAV of a debt oriented Mutual Fund is 22.25 cum dividend. It has
declared a dividend of 6%, record date

being 25 Jun 2006. Calculate the dividend receivable by an individual investor if

he holds 10000 units.

(2)

A) Rs. 5250.0

B) Rs. 6000.0

C) Rs. 5158.5

D) Rs. 4653.6

43.Brijesh, age 48, plans to retire at 65 and wants to be debt free at retirement.
The balance sheet mortgage is Rs. 114042 at the end of the 10th year of a 30
year loan. The monthly payment was Rs. 953.89. What was the original balance
of the loan if the interest rate was 8%? (Select closest answer) (4)

A) Rs. 140000

B) Rs. 130000

C) Rs. 120000

D) Rs. 125000

44.Sunil has purchased 100 convertible debentures of XYZ on 1/1/2001 at Rs.

500 each. 30% of the value of debentures in convertible into one share of Rs. 50
each after 6 years. Sunil exercised his option on 1/1/2007 and received 100
shares. Compute the cost of acquisition off these shares. (4)

A) Rs. 150

B) Rs. 500

C) Rs. 155

D) Rs. 145
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45.A Firm's Current Ratio is 1.4, Current Liability is Rs. 1600, Acid Test Ratio is
1.2, and Inventory Turnover

Ratio is 8. What would be the cost of goods sold for the firm? (4)

A) Rs. 2240

B) Rs. 1920

C) Rs. 2560

D) Rs. 2750

46) Balvinder placed Rs. 10000 with a mutual fund which charged him a load of
2.25%. Management and other fees charged is 1.10%. Ignoring other costs over
5 years, what annual returns would the fund have to produce to equal the value
that the investment would have earned in 8% fixed deposit? (4)

A) 8.59%

B) 9.00%

C) 8.00%

D) 9.59%

Theory

If the Buying price of a property is Rs. 20 lakh, Net income is Rs. 2 lakh and

Market yield is 8%, the value of the property is Rs. __________. 2

A 20 lakh

B 22 lakh

C 25 lakh

D None of the above

. A company offers a rights issue of one for two for Rs. 7 each. The current
market

price is Rs. 13. The expected ex-right market price would be Rs. _______. 2

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A9

B 10

C 11

D None of the above

Which of the following items would affect net worth of your client?

1. Repayment of a loan using fund from a savings account

2. Purchase of car which is 75% financed with 25% down payment

3. The Nifty is appreciating, and the client is holding Nifty Indexed Mutual Fund

4. Interest rate increases and the client holds substantial bond portfolio 4

14

A 3 & 4 only

B 2 & 3 only

C 1, 3 & 4 only

D All of the above

63. If the net present value of a series of discounted cash flows is less than zero,
one

could interpret that:

1. The discounted cash flows are lower than the investment outlay

2. The rate of return is lower than the cost of capital

3. The return of investment is higher than the internal rate of return

4. The internal rate of return was the discount rate used 4

A 1, 2, 3 & 4

B 2 and 3 only

C 1 and 4 only

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D 1 only

Which of the following statements is/are true regarding strategic and tactical
asset

allocation?

1) Strategic asset allocation involves selection of the correct asset allocation

based

on risk tolerance of the client, economic forecasts, and expectations of selected

asset classes and rebalancing once or twice per year to keep the portfolio within

the parameters of the desired strategic mix.

2) Tactical asset allocation involves evaluating asset classes or industries as to

their value and selling undervalued classes and purchasing overvalued classes.

A 1 only is true

B 2 only is true

C Both 1 & 2 are true

D Neither 1 nor 2 is true

All The Best !!!

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