Investment questions with answer (7&10 marks)

Q1) Explain attributes of an investment.

Investment refers to a tool used by people for allocating their funds with the aim of generating revenue.
Investment simply refers to the purchase of assets by people not meant for immediate consumption but for
future use that is wealth creation.

‘Engagement of fund or savings in different assets to get optimum returns.’

1) Liquidity and Collateral value

A liquid investment is one which can be converted into cash immediately without monetary loss. Liquid
investments help investors meet emergencies. Stocks are easily marketable only when they provide adequate
return through dividends and capital appreciation. Portfolio of liquid investments enables the investors to raise
funds through the sale of liquid securities or borrowing by offering them as collateral security. The investor
invests in high grade and readily saleable investments in order to ensure their liquidity and collateral value.

2) Stable income

Investors invest their funds in such assets that provide stable income. Regularity of income is consistent with
a good investment programme. The income should not only be stable but also adequate as well.

3) Capital growth

One of the important principles of investment is capital appreciation. A company flourishes when the industry
to which it belongs is sound. So, the investors, by recognizing the connection between industry growth and
capital appreciation should invest in growth stocks. In short, right issue in the right industry should be bought
at the right time.

4) Tax implications

While planning an investment programme, the tax implications related to it must be seriously considered. In
particular, the amount of income an investment provides and the burden of income tax on that income should
be given a serious thought. Investors in small income brackets intend to maximize the cash returns on their
investments and hence they are hesitant to take excessive risks. On the contrary, investors who are not
particular about cash income do not consider tax implications seriously.

5) Stability of Purchasing Power

Investment is the employment of funds with the objective of earning income or capital appreciation. In other
words, current funds are sacrificed with the aim of receiving larger amounts of future funds. So, the investor
should consider the purchasing power of future funds. In order to maintain the stability of purchasing power,
the investor should analyze the expected price level inflation and the possibilities of gains and losses in the
investment available to them.

6) Legality

The investor should invest only in such assets which are approved by law. Illegal securities will land the
investor in trouble. Apart from being satisfied with the legality of investment, the investor should be free from
management of securities. In case of investments in Unit Trust of India and mutual funds of Life Insurance
Corporation, the management of funds is left to the care of a competent body. It will diversify the pooled funds
according to the principles of safety, liquidity and stability.

Q2) How is technical analysis difference from fundamental analysis?

Fundamental Analysis considers all the factors that are core to the business. Factors such as financial
statements, economic factors, industry, management process, etc. Fundamental analysis helps determine the
firm’s intrinsic value to identify whether the stock is overpriced or under-priced.

The technical analysis considers the historical stock price movements. It leverages the patterns, trends, and
also past charts to forecast the stock’s future price movements.

Basis for
Fundamental analysis Technical analysis
comparison
Fundamental analysis is a practice Technical analysis is a method of
of analyzing securities by determining the future price of the
Meaning
determining the intrinsic value of stock using charts to identify the
the stock. patterns and trends.
Relevant for Long term investments Short term investments
Function Investing Trading
To identify the intrinsic value of To identify the right time to enter or
Objective the stock. exit the market.
Decisions are based on the
Decision information available and Decisions are based on market trends
making statistic evaluated. and prices of stock.

Focuses on Both past and present data. Past data only.

Economic reports, news events
Form of data and industry statistics. Chart analysis

Predicted on the basis of past Predicted on the basis of charts

Future prices and present performance and and indicators.
profitability of the company.
Type of trader Long term position trader. Swing trader and short-term day trader.
Q3) Explain key macro-economic variables and impact on stock market
1) GDP
2) Savings and investment
3) Inflation
4) Interest rate
5) Tax structure
6) BOP
7) Infrastructure

Q4) Distinguish between CAPM &APT

CAPM APT
It means the capital asset pricing model. It means arbitrage pricing theory
CAPM is based on an investor’s portfolio demand APT is based on the factors model of returns and
and equilibrium arguments. the approximate arbitrage arguments
It is based on risk-return trade-off. It is based on mathematical and statistical data
theory
It is difficult to find a good proxy for market return. It is difficult to identify approximate factors.
It has a simple beta. It has several relevant data.
CAPM is a single factor model. APT is a multifactor model.
CAPM requires that the market portfolio be There is no special role in the market portfolio in
efficient. APT.
CAPM assumes that the probability distributes of APT does not make any assumption about the
asset returns are normally distributed. distribution of asset returns.

Q5) Explain the Sharpe’s single index model

This model generates cut off rate and only those securities which have higher excess return to beta ratio than
cut off rate are included in optimal portfolio. The single Index model formulates cut-off rate based on data
inputs and selects only those securities which have higher excess return to beta ratio as compare to cut-off
rate. Then based on residual variance (unsystematic risk) of the security, excess return to beta ratio, beta of
the security and cut-off rate, proportion or weightage of the investment of the selected security is computed.
Various financial and statistical methodologies are used for implementation of the model.
With the help of Single index model, portfolio managers and security analysts can easily identify based on
security’s excess return to beta ratio, whether security should be included as part of optimal portfolio or not.
Single index model gives ‘single value’ which explains the desirability of including any security in the
portfolio. This ‘single value’ is excess return to beta ratio of that security. This excess return to beta ratio
shows how much additional return for the security is generated for every unit of systematic risk (non-
diversifiable risk).

Securities are ranked based on excess return to beta ratio from Highest to lowest, this ranking represent the
desirability of including that security in portfolio. So, if security with particular ranking is included in
portfolio, all the securities with ranking above will be included as well.

Same way if security with particular ranking is not part of the portfolio all securities below that security in
terms of ranking will also be excluded from portfolio. Selection of the security is done based on cut-off rate.
So, all the securities having

Q6) What is random walk theory? Explain weak form, strong form and semi strong
Random walk theory
The theory that stocks price changes have the same distribution and are independent of each other, so the past
movement or trend of a stock price or market cannot be used to predict its future movement.
In short, this is the idea that stocks take a random and unpredictable path. A follower of the random walk
theory believes it's impossible to outperform the market without assuming additional risk.
What Is Market Efficiency?
When money is put into the stock market, the goal is to generate a return on the capital invested. Many
investors try not only to make a profitable return, but also to outperform, or beat, the market.
Efficient market Hypothesis
An investment theory that states it is impossible to "beat the market" because stock market efficiency causes
existing share prices to always incorporate and reflect all relevant information.
According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for
investors to either purchase undervalued stocks or sell stocks for inflated prices.
As such, it should be impossible to outperform the overall market through expert stock selection or market
timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier
investments.
Weak form efficiency
One of the different degrees of efficient market hypothesis (EMH) that claims all past prices of a stock are
reflected in today's stock price. Therefore, technical analysis cannot be used to predict and beat a market.
Theoretical in nature, weak form efficiency advocates assert that fundamental analysis can be used to identify
stocks that are undervalued and overvalued. Therefore, keen investors looking for profitable companies can
earn profits by researching financial statements.
'Semi-strong form efficiency
A class of EMH (Efficient Market Hypothesis) that implies all public information is calculated into a stock's
current share price. Meaning that neither fundamental nor technical analysis can be used to achieve superior
gains.
This class of EMH suggests that only information that is not publicly available can benefit investors seeking
to earn abnormal returns on investments. All other information is accounted for in the stock’s price and,
regardless of the amount of fundamental and technical analysis one performs, above normal returns will not
be had.
'Strong form efficiency'
The strongest version of market efficiency. It states all information in a market, whether public or private, is
accounted for in a stock price. Not even insider information could give an investor the advantage.
This degree of market efficiency implies that profits exceeding normal returns cannot be made, regardless of
the amount of research or information investors have access to.

Q7) Explain different money market instrument available in India.

1) Treasury Bills
T-bills are one of the most popular money market instruments. They have varying short-term maturities. The
Government of India issues it at a discount for 14 days to 364 days.
These instruments are issued at a discount and repaid at par at the time of maturity. Also, a company, firm, or
person can purchase TB’s. And are issued in lots of Rs. 25,000 for 14 days & 91 days and Rs. 1,00,000 for
364 days.
2) Commercial Bills
Commercial bills, also a money market instrument, works more like the bill of exchange. Businesses issue
them to meet their short-term money requirements.
These instruments provide much better liquidity. As the same can be transferred from one person to another
in case of immediate cash requirements.
3) Certificate of Deposit
Certificate of deposit or CD’s is a negotiable term deposit accepted by commercial banks. It is usually issued
through a promissory note.
CD’s can be issued to individuals, corporations, trusts, etc. Also, the CD’s can be issued by scheduled
commercial banks at a discount. And the duration of these varies between 3 months to 1 year. The same, when
issued by a financial institution, is issued for a minimum of 1 year and a maximum of 3 years.
4) Commercial Paper
Corporates issue CPs to meet their short-term working capital requirements. Hence serves as an alternative to
borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year.
The Reserve Bank of India lays down the policies related to the issue of CP’s. As a result, a company requires
RBIs prior approval to issue a CP in the market. Also, CP has to be issued at a discount to face value. And the
market decides the discount rate.
Denomination and the size of CP:
Minimum size – Rs. 25 lakhs
Maximum size – 100% of the issuer’s working capital
5) Call Money
It is a segment of the market where scheduled commercial banks lend or borrow on short notice (say a period
of 14 days). In order to manage day-to-day cash flows.
The interest rates in the market are market-driven and hence highly sensitive to demand and supply. Also, the
interest rates have been known to fluctuate by a large % at certain times.

Q8) Process of investment

Stages in investment process.

o Set investment policy

o Perform security analysis
o Construct a portfolio
o Portfolio revision
o Evaluate performance of portfolio

Source CHAPTER - I ([Link])

Q9) Explain risk. And discuss its types

Risk
The actual returns that an investor receives from a stock may vary from his expected return and the this
probability of variance itself is the risk.
Risk is expressed in terms of variability of return.
An investor before investing in securities must properly analyse the risks associated with these securities.
Sometimes the term risk and uncertainty are used interchangeably but uncertainty the possible events and
probabilities of their occurrence are not known, whereas in case of risk they are known. So, risk and
uncertainty are different from each other.
• Systematic Risk
• Unsystematic Risk

A. Systematic Risk
It is the risk that is caused by external factors such as economic, political and sociological conditions.
It affects the functioning of the entire market.
Since these risks arise due to external factors, they are beyond the control of the company affected, and hence
are uncontrollable or referred to as undiversifiable risk.
They are of three types:
• Market risk
• Interest rate risk
• Purchasing power risk
 1) Market Risk
Jack Clark Francis Ph.D., Professor of Economics and Finance at Bernard Baruch College in New York has
defined market risk as that portion of the total variability of returns that is caused by the alternating forces of
bull and bear markets.
When the stock market moves upwards, it is known as bull market. On the other hand, when the stock market
moves downwards, then it is known as bear market.
The two forces that affect the market are:
Tangible events: Earthquake, war, political uncertainty and decrease in the value of money are some of the
examples of tangible events.
Intangible events: It is related to market psychology. Political unrest or fall of government affects the market
sentiments. Inflow of foreign funds may make the market psychology positive.
2) Interest Rate Risk
It is the risk caused by the variations in the market interest rates.
Prices of debentures, bonds, etc. are mainly affected by the interest rate risk. (as demand for bonds and
debentures varies directly with the ups and downs of the stock market)
Extensive use of borrowed funds in the stock market.
The causes of interest rate risk are as follows:
• Changes in the government's monetary policy
• Changes in the interest rate of treasury bills
• Changes in the interest rate of government bonds

3) Purchasing Power Risk

Variations in returns are caused by the loss of purchasing power of currency.
So, the purchasing power risk is the probable loss in the purchasing power of the returns to be received in the
future.
There are mainly two types of inflation:
Demand-pull inflation: The demand for goods and services remains higher than the supply.
Cost-push inflation: There is a rise in price due to the increase in the cost of production.
B. Unsystematic Risk
It is a type of risk which is unique, specific and related to a particular industry/Company
Managerial inefficiency, changes in preferences of the consumers, availability of raw material, labour
problems, etc. are some of the causes of unsystematic risk.
These are of two types:
• Business risk
• Financial risk

1) Business risk
It is the risk that is caused by the inefficiency of a company to manage its growth or stability of earnings.
It can be classified as:
Internal business risk: It is the risk that is associated with the operational efficiency of a company:
• Fluctuations in the sales
• Research and Development
• Personnel Management
• Fixed Cost
• Single Product
External business risk: It is the risk that is the result of operating conditions imposed on the firm by the
external environment:
• Social and regulatory factors
• Political risks
• Business cycle

2) Financial Risk
It is associated with the capital structure of the company, which consists of equity and borrowed funds.
A financial risk can be avoided by analysing the capital structure of the company.
The financial risk considers the risk between EBIT and EBT.
The payment of interest affects the eventual earnings of the company.

Q10) Explain the assumption of CAPM

Assumptions of CAPM
• The investors are risk-averse
• Choice on the basis of risks and returns
• Similar expectations of risk and return
• Free access to all available information
• There is a risk-free asset and there is no restriction on borrowing and lending at the risk-free rate

Q11) Explain the various levels of information

Levels of Information: - Information is processed form of data i.e. data that have been processed and shaped
into a form that is meaningful to its users is known as information.
Davis and Olson have defined information as “Data that has been processed into a from that is meaningful to
the recipient and is of real or perceived value in current or prospective actions or decisions”.
Information is derived from data. For example, volume of the room is the information which can be derived
from the data by using the formula.
It is the main activity of the computer to process data produce useful information.
There are three levels of information systems:

1. Strategic information
2. Tactical information
 3. Operational information

1) Strategic information
This level of information is needed for long-range planning policies and deciding the business should take.
Strategic information is used by the top management to make plans for the organization and to ensure that the
business objectives are organization and to ensure that the business objectives are achieved with the help of a
system called Executive Support System.
For example, information like population growth would be of interest to the top management which is
responsible for determining long range goals.
Strategic information is concerned with long term organization planning and is helpful in taking decisions that
are unstructured and are made less frequently.
Strategic information is concerned with long term organization planning and is helpful in taking decisions that
are unstructured and are made less frequently.

2) Tactical information
Tactical information is used in making short rang decisions to run the business efficiently.
For example, sales analysis, annual financial statements are used for short range planning i.e. for months rather
than years.
Tactical information is used by the middle management for ensuring that the resources are used for allocating
resources and establishing controls in order to execute or implement the plans made by top level management.
Tactical information is usually used for the decision making at middle management level with the help of a
system called decision Support System.

3) Operational information
Operational information is required for short term daily operations of a business organization.
It includes the information related to day-to-day details of the business. For example, daily absent information
of employees and current stock available for sales.
Operational information is used by lower-level management\mangers to ensure that assigned tasks are planned
and carried out properly in the business organization.

Q12) Dow Jon’s theory

The Dow theory is a financial theory that says the market is in an upward trend if one of its averages
(i.e. industrials or transportation) advances above a previous important high and is accompanied or followed
by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs
to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a
reasonable period of time.
Understanding the Dow Theory
The Dow theory is an approach to trading developed by Charles H. Dow who, with Edward Jones and Charles
Bergstresser, founded Dow Jones & Company, Inc. and developed the Dow Jones Industrial Average in 1896.
Dow fleshed out the theory in a series of editorials in the Wall Street Journal, which he co-founded.1

Charles Dow died in 1902, and due to his death, he never published his complete theory on the markets, but
several followers and associates have published works that have expanded on the editorials.

Dow believed that the stock market as a whole was a reliable measure of overall business conditions within
the economy and that by analysing the overall market, one could accurately gauge those conditions and
identify the direction of major market trends and the likely direction of individual stocks.

The theory has undergone further developments in its 100-plus-year history, including contributions by
William Hamilton in the 1920s, Robert Rhea in the 1930s, and E. George Shaefer and Richard Russell in the
1960s. Aspects of the theory have lost ground, for example, its emphasis on the transportation sector or
railroads, in its original form but Dow's approach still forms the core of modern technical analysis.

Dow Theory Definition ([Link])

Q13) Bond portfolio management strategies.

1) Active Portfolio Management Strategy

The Active portfolio management relies on the fact that particular style of analysis or management can
generate returns that can beat the market. It involves higher than average costs and it stresses on taking
advantage of market inefficiencies. It is implemented by theadvices of analysts and managers who analyze
and evaluate market for the presence of inefficiencies.

The active management approach of the portfolio management involves the following stylesof the stock
selection.

Top-down Approach: In this approach, managers observe the market as a whole and decide about the
industries and sectors that are expected to perform well in the ongoing economic cycle. After the decision is
made on the sectors, the specific stocks are selected on the basis of companies that are expected to perform
well in that particular sector.

Bottom-up: In this approach, the market conditions and expected trends are ignored and the evaluations of
the companies are based on the strength of their product pipeline, financial statements, or any other criteria.
It stresses the fact that strong companies perform well irrespective of the prevailing market or economic
conditions.
 2) Passive Portfolio Management Strategy
Passive asset management relies on the fact that markets are efficient and it is not possible to beat the market
returns regularly over time and best returns are obtained from the low-cost investments kept for the long term.
The passive management approach of the portfolio management involves the following styles of the stock
selection.
Efficient market theory: This theory relies on the fact that the information that affects the markets is
immediately available and processed by all investors. Thus, such information is always considered in
evaluation of the market prices. The portfolio managers who follow this theory, firmly believes that market
averages cannot be beaten consistently.
Indexing: According to this theory, the index funds are used for taking the advantages of efficient market
theory and for creating a portfolio that impersonate a specific index. The index funds can offer benefits over
the actively managed funds because they have lower than average expense ratios and transaction costs. Apart
from Active and Passive Portfolio Management Strategies, there are three more kinds of portfolios including
Patient Portfolio, Aggressive Portfolio and Conservative Portfolio.
Patient Portfolio: This type of portfolio involves making investments in well-known stocks. The investors
buy and hold stocks for longer periods. In this portfolio, the majority of the stocks represent companies that
have classic growth and those expected to generate higher earnings on a regular basis irrespective of financial
conditions.
Aggressive Portfolio: This type of portfolio involves making investments in “expensive stocks” that provide
good returns and big rewards along with carrying big risks. This portfolio is a collection of stocks of companies
of different sizes that are rapidly growing and expected to generate rapid annual earnings growth over the next
few years.
Conservative Portfolio: This type of portfolio involves the collection of stocks after carefully observing the
market returns, earnings growth and consistent dividend history

Q14) Types of Mutual fund?

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to
invest in securities like stocks, bonds, money market instruments, andother assets. Mutual funds are operated
by professional money managers who allocate the fund's assets and attempt to produce capital gains or
income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the
investment objectives stated in its prospectus.
1) Equity funds
2) Debt funds
3) Money market funds
4) Hybrid funds
5) Asset allocation funds
6) Sector funds
7) Technology funds
8) Exchange traded funds
9) Commodity funds
10) Fund of funds
11) Real estate funds

Source: Types of Mutual Funds - Types Based on Asset Class, Structure & Risk - DifferentMutual Fund
Types ([Link])
Q15) Explain any 4 chart patterns in technical analysis of security.

1) Bar Chart

Bar charts are also referred to as OHLC charts as they use all the four price points i.e. open, high, low and
closing prices of a security for the selected time frame unlike a line chart
which uses only the closing price. Hence, bar charts are made up of a series of vertical lines/bars that represent
the price range for a given period with a horizontal dash/tick on each side of the bar that represents the open
and closing prices.
Simply put, a bar comprises of the following three components:
The verticle line – The top of the line/bar indicates the highest price the security has reached, and bottom end
of the bar indicates the lowest price for the specified time period. The length of the bar indicates the range for
the same time period.
The left horizontal dash/tick – indicates the opening price for the same period.
The right horizontal dash/tick – indicates the closing price forthe same period.

2) Line Chart

The line chart is the most basic chart type and it uses only one data point to form the chart. In technical
analysis, closing prices of a security over a specified time frame is the data pointused to plot a line chart. On
the chart, a dot is placed for each closing price for the specified time frame and all the dots are then connected
by a line from left to right. If we are looking at 50-day data then the line chart is formed by connecting the
dots of the closing prices ofthe 50 days.
 3) Candlestick charts
Candlestick charts give the same information as bar charts but differs in the way it looks. The representation
of OHLC prices looks like a candlestick, hence the name of the chart. The candlestick, like a bar chart is made
up of the following three components.
1. Central real body – The real body is rectangular in shape connecting the opening and closing price
2. Upper shadow – Connects the high point to the close/open depending on the price movement during the
specified time frame. For a bullish candle, the upper shadow connects to the closing price while for a bearish
candle it connects to the opening price. See the below image for clarity.
3. Lower Shadow – Connects the low point to the close/open depending on the price movement during the
specified time period. For a bullish candle, the lower wick connects to the opening price while for a bearish
candle it connects to the closing price. Shadows are also referred to as wicks or tails.

4) Point and figure chart

It is completely different when compared to the above three charts. It was used extensively before the
introduction of computers for stock analysis. However, it is hardly being used bytraders or investors these
days because it is complex to understand and provides limited information.

Sources: -[Link]
and-how-to-interpret-them-120052800196_1.html

[Link]

Q16) Explain the various types of instruments is available for investment

1) Fixed Deposits
2) Mutual Funds
3) Recurring Deposits
4) Public Provident Fund
5) Employee Provident Fund
6) National Pension Scheme
7) Stocks
8) Bonds or Debentures
9) Real Estate
10) Gold
11) Life Insurance
Sources: Investment: Importance & Avenues of Investing Money – Franklin Templeton India

What are the different investment avenues available in the Indian market? - InvestorZone

Q17) Functions of primary market

Primary Market/ New issue Market

Primary Market is a Market for new issue of securities, which are issued to public for first time. Primary
market is also known as New Issue Market. It is used by both new and existing companies.

The company issues new shares and debentures for collecting long term funds. The purchaser of new shares
and debentures may be businessmen, customers of the company, employees of the company, existing
shareholders, etc.

The issue of securities is made through the prospectus. Functioning of primary markets facilitates
the capital formation by channelizing of funds from individual savers into proper productive investments

Functions

1) Origination

In primary market, origination means to investigate, evaluate and procedure new project proposals. It
initiates before an issue is present in the market. It is done with the help of merchant bankers.

The merchant bankers can be banks, financial institutions, private investment firms, etc.

In primary market, the preliminary investigation involves a detailed study of economic, financial, legal,
technical aspects to ensure the soundness of the project. The second function is performed by sponsoring
institutions. They provide advisory service.

Decisions: Time of floating the issue, Type of issue, Price of the issue

2) Underwriting

In primary market, to ensure success of new issue, there is a need for underwriting firms. The company
needs to appoint underwriters. They can be banks or financial institutions or specialized underwriting firms.

In primary market, underwriting can be done by a single underwriter or by a group of underwriters.

Minimum subscription is guaranteed by underwriters. If the issue is completely subscribed, no liability
would be left for the underwriters. If by chance any part of the issue remains unsold, afterwards the
underwriter has no option, rather than buying all the unsubscribed shares.

LIC, UTI, IDBI, General Insurance companies, Brokers.

3) Distribution

In primary market, the success of any brand-new issue is hinges on the issue is being subscribed by the
people. The sale of the securities to the supreme or highest investors is termed as distribution.

Distribution Job is given to brokers and dealers. The brokers or agents maintain direct contact with the
supreme investors. Carried out by: Brokers & agents.

Q18) Different risk associated with bond.

1) Default risk
2) Marketability risk
3) Callability risk
4) Interest rate risk

Q19) Determinants of bond interest rate. Determinants of Interest rates ([Link])

Q20) Functions of stock exchange

Functions of Stock Exchange

Following are some of the most important functions that are performed by stock exchange:

1. Role of an Economic Barometer: Stock exchange serves as an economic barometer that is indicative
of the state of the economy. It records all the major and minor changes in the share prices. It is rightly
said to be the pulse of the economy, which reflects the state of the economy.
2. Valuation of Securities: Stock market helps in the valuation of securities based on the factors of
supply and demand. The securities offered by companies that are profitable and growth-oriented tend
to be valued higher. Valuation of securities helps creditors, investors and government in performing
their respective functions.
3. Transactional Safety: Transactional safety is ensured as the securities that are traded in the stock
exchange are listed, and the listing of securities is done after verifying the company’s position. All
companies listed have to adhere to the rules and regulations as laid out by the governing body.
4. Contributor to Economic Growth: Stock exchange offers a platform for trading of securities of the
various companies. This process of trading involves continuous disinvestment and reinvestment,
which offers opportunities for capital formation and subsequently, growth of the economy.
5. Making the public aware of equity investment: Stock exchange helps in providing information
about investing in equity markets and by rolling out new issues to encourage people to invest in
securities.
6. Offers scope for speculation: By permitting healthy speculation of the traded securities, the stock
exchange ensures demand and supply of securities and liquidity.
7. Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready platform
for the sale and purchase of securities. This gives investors the confidence that the existing investments
can be converted into cash, or in other words, stock exchange offers liquidity in terms of investment.
 8. Better Capital Allocation: Profit-making companies will have their shares traded actively, and so
such companies are able to raise fresh capital from the equity market. Stock market helps in better
allocation of capital for the investors so that maximum profit can be earned.
9. Encourages investment and savings: Stock market serves as an important source of investment in
various securities which offer greater returns. Investing in the stock market makes for a better
investment option than gold and silver.

Q21) Difference b/w primary and secondary stock market

Primary market Secondary market

Also called as New Issue Market (NIM) After Issue Market (AIM)

Intermediaries Investment banks Brokers

Role of the market Market where stocks are issued Market where stocks are traded
for the first time once issued

Sale of securities Directly by companies to Sold and purchased amongst

investors investors and traders

Price of shares Fixed at par value Changes depending on the

supply and demand of shares

Q22) Explain Active and Passive Portfolio Management

Active Portfolio Management

The foremost aim of active portfolio management is to overtake the returns of its underlying benchmark index.
The premise behind active management is that a skilled portfolio manager, backed by a specialist investment
team, can select such securities for a portfolio which would surpass returns posted by its benchmark index or
some other relevant measure of portfolio performance.
Investors pay a fee to the portfolio manager for his expertise and experience that goes into securities selection
with expectations that his in-depth research would yield favourable results which will compensate for the fee
which is typically higher than a passive strategy.
Passive Portfolio Management
The investment philosophy behind passive portfolio management is based on Efficient Market Hypothesis.
This theory postulates that financial markets are efficient pricing-wise. All investors have all information
available to them at all times with no inside information which could benefit a certain segment of the market.
If this is the case, then there is little room, if any, for an investor to beat the market, thus making active
management less effective.

Q23) Steps involving in constructions of sharps optimal portfolio

 Step 1
Determine “excess return to β” ratio for each stock and rank them on that basis from highest to lowest
Step 2
Determine cut-off rate (C)
Step 3
Find the optimal cut-off point (the highest of all) and select all securities up to such cut-off point from Rank
1 onwards.
Step 4
Determine the proportions of each security (w) to be included in the portfolio by using formula
Step 5
Convert the proportions into appropriate weights such that aggregate of weights should be equal to 1.00 or
100%.

Q24) What is portfolio revision? explain portfolio revision strategy

Portfolio Revision
The art of changing the mix of securities in a portfolio is called as portfolio revision.
The process of addition of more assets in an existing portfolio or changing the ratio of funds invested is called
as portfolio revision.
The sale and purchase of assets in an existing portfolio over a certain period of time to maximize returns and
minimize risk is called as Portfolio revision.
Portfolio Revision Strategies

There are two types of Portfolio Revision Strategies.

1. Active Revision Strategy

Active Revision Strategy involves frequent changes in an existing portfolio over a certain period of
time for maximum returns and minimum risks.

Active Revision Strategy helps a portfolio manager to sell and purchase securities on a regular basis
for portfolio revision.

2. Passive Revision Strategy

Passive Revision Strategy involves rare changes in portfolio only under certain predetermined rules.
These predefined rules are known as formula plans.

According to passive revision strategy a portfolio manager can bring changes in the portfolio as per
the formula plans only.

Q25) Explain various participants in mutual fund

Structure of Mutual Funds in India | Three-Tier Structure | Sponsor | AMC | ([Link])