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Question paper
Introduction to Security Analysis
(MB3G1F) : October 2008
Section A : Basic Concepts (30
Marks)
• This
section consists of questions with serial number 1 - 30.
• Answer
all questions.
• Each
question carries one mark.
• Maximum
time for answering Section A is 30 Minutes.
1.
Which of the following purpose is not served by an index?
(a)
It is helpful in evaluating the portfolio
risk-return analysis
(b)
It serves as a barometer of the
changes in trading patterns in the stock market
(c)
The growth in the primary market
can be measured through the movement of indices
(d)
It is useful indicator of a
country’s economic health
(e)
Indices can be calculated
industry-wise to know their trend pattern and also for comparative purposes
across the industries and with the market indices.
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2. Which of the following
statements are true with respect
to Beta? |
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I.
Beta is the slope of the Security Market Line.
II. Beta
measures the non-diversifiable risk.
III. Beta indicates the manner in which a security’s return changes
systematically with changes in the market’s return.
IV. Beta greater than one is referred
to as an aggressive security.
(a)
Both (I) and (III) above
(b)
Both (II) and (III) above
(c)
(I), (III) and (IV) above
(d)
(II), (III) and (IV) above
(e)
All (I), (II), (III) and (IV)
above.
<Answer
3. In a portfolio consisting of two securities in which funds have been
invested in equal proportions, one of the > securities is risk-free security and the other one is risky
security. The standard deviation of the portfolio will be equal to
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(a) |
The
standard deviation of the risky security |
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(b) |
Half of the standard deviation of the risky
security |
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(c) |
One-fourth of the standard deviation of the risky
security |
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(d) |
Twice the standard deviation of the risky
security |
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(e) |
Zero. |
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4. Consider the following data
about two securities A and B: |
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Particulars |
Particulars |
Security A |
Security B |
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Expected Return (%) |
12 |
13 |
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Standard deviation of returns (%) |
21 |
29 |
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Beta |
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1.10 |
1.20 |
Variance of returns on the market index is 400 (%)2 . The correlation coefficient
between the returns on securities A and B is 0.94.
The
systematic risk of a portfolio consisting of these two securities in equal
proportions is
(a) 24.63(%)2
(b) 460.00(%)2
(c) 529.00(%)2
(d) 606.73(%)2
(e) 802.40(%)2.
<Answer
>
1
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5. Anirudh Ltd., issues right shares which increases the market value of
the shares of the company by Rs.150 > crore. The aggregate market value of all the shares included in
the index before the right issue made is Rs.2,500 crore. If, the Base year
average for calculating the index number for a period starting from the time
the right issue is made till the next base year change becomes necessary is
Rs.1,010 crore, what is the existing base year average?
(a)
Rs.1,070.60 crore
(b)
Rs.1,005.94 crore
(c)
Rs. 952.83 crore
(d)
Rs. 949.40 crore
(e)
Rs. 823.23
crore.
6.
Which of the following is true, if entry barriers are low and exit barriers are high in the
industry?
(a)
Returns are low and stable
(b)
Returns are high and stable
(c)
Returns are low and risky
(d)
Returns are high and risky
(e)
Returns may vary depending on
industry selected.
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>
<Answer
7. Change
in which of the following accounting policies will not affect the profit figures reported between two > time periods?
(a)
Treatment of R & D expenditure
(b)
Treatment of gratuity liability
(c)
Valuation of Inventories
(d)
Treatment of depreciation
provisions
(e)
Revaluation of financial
investment for treasury operations.
<Answer
8. A
convertible bond with a face value of Rs.1,000 had been issued at Rs.1,300 with
a coupon rate of 14%. > The conversion rate is 20 shares per
bond. The current market price of the bond is Rs.1,650 and that of stock
is Rs.66.
The premium over conversion value is
(a)
8.33%
(b)
20.00%
(c)
25.00%
(d)
30.00%
(e)
41.67%.
9.
Which of the following statements is/are not true regarding the Price/Sales
(P/S) ratio?
I.
P/S ratio is useful for valuing companies even with
no dividends at all.
II. P/S ratio
can be positive or negative.
III.
Firms with low profit margins and
high P/S ratio are undervalued.
IV. P/S ratio is not influenced by accounting
methods.
(a)
Only (I) above
(b)
Only (II) above
(c)
Both (I) and (III) above
(d)
Both (II) and (III) above
(e)
(II), (III) and (IV) above.
10 Which of the following statements is false with respect to the two-stage dividend discount model? . (a) It is difficult to specify
the supernormal growth period with precision
(b)
The model suffers with the
limitation of the change of high supernormal growth to a lower stable growth
rate at the end of the supernormal growth period
(c)
The terminal price calculated in
this model is derived from Gordon model
(d)
This model is best suited to
those firms which have a high growth rate in the beginning and a gradual
decline in the growth rate over a period of time
(e)
This model assumes high-growth period and
stable-growth period for valuing a stock.
<Answer
>
<Answer
>
2
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11. The
current share price of Excel Ltd., is Rs.78 per share and the dividend is
expected to be Rs.5.80. The > duration of this stock will be
(a)
11.50 years
(b)
12.22 years
(c)
13.45 years
(d)
20.55 years
(e)
22.22 years.
12 Which of the following
statements is a property of realized yield?
. (a) For bonds
with longer term to maturity, realized yield will be higher than the
reinvestment rate
(b)
If the reinvestment rate is
greater than realized yield, the realized yield will be lesser than YTM
(c)
Even if the coupons are
reinvested at a rate different from the YTM, the realized yield will be equal
to promised YTM
(d)
If the reinvestment rate is
greater than realized yield, the realized yield will be equal to YTM
(e)
For bonds with shorter term to
maturity, realized yield will be closer to the YTM.
<Answer
>
<Answer
13 IDBI
came out with an issue of deep discount bonds. Each bond having a face value of
Rs.1,25,000 was >
. issued at
a deep discounted price of Rs.480.50 with a maturity period of 15 years. The
corporate tax rate applicable is 25%. If the indexed cost of acquisition is
25%, then the post-tax yield to maturity of the bond is
(a)
42.47%
(b)
35.21%
(c)
29.67%
(d)
11.58%
(e)
5.37%.
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14 Which of the following would
be true evidence against the
semi-strong form of market efficient theory? |
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. (a) |
No
investor can make superior profits by purchasing or selling stock after the
announcement of |
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unexpected rise in dividend
(b)
Trend analysis is worthless in
determining stock prices
(c)
Positive abnormal returns can be
expected from low P/E stocks
(d)
Mutual fund managers do not
persistently make superior returns
(e)
Investors cannot make superior
profits by changing his portfolio according to change in the interest rates.
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15 An index model regression
applied to past monthly returns in ACC stock price produces the following |
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. estimates, which are believed to be stable
over time: |
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rACC =
0.15% + 1.2 rM |
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If the return on market index subsequently rises by 8%
and return on ACC’s stock rises by 7%, the abnormal |
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return
earned on ACC’s stock will be |
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(a) |
–2.75% |
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(b) |
–1.65% |
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(c) |
0.55% |
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(d) |
1.65% |
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(e) |
2.75%. |
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16 Which of the following techniques is used to identify the trend
reversal before it takes place? . (a) Volume of the market
(b)
Momentum
(c)
Simple moving average
(d)
Breadth of the market
(e)
Weighted moving average.
<Answer
>
3
17 Which of the following statements are not true with respect to Triangles of Technical Analysis? . I. In Symmetrical Triangle,
volumes increase as the triangle narrows towards the apex.
II.
A Symmetrical Triangle cannot be
said to be in a continuation pattern or a reversal pattern before the breakout.
III. With Right angled Triangle, the
resistance or support level cannot be determined.
IV. In
Right angled Triangle, the direction of breakout can be identified before the
actual breakout.
(a)
Both (I) and (III) above
(b)
Both (II) and (IV) above
(c)
Both (III) and (IV) above
(d)
(I), (II) and (III) above
(e)
All (I), (II), (III) and (IV) above.
18 Which of the following
statements is/are true in relation
to futures contract?
. I. The
difference between the two prices of the futures contract is called as spread.
II. The inter
commodity futures spreads require lower margin than single futures contract.
III. Basis is equal to futures
price minus current cash price.
IV. Basis is higher for futures contracts with
longer maturity.
(a)
Only (I) above
(b)
Both (I) and (II) above
(c)
Both (III) and (IV) above
(d)
(I), (II) and (IV) above
(e)
(I), (III) and (IV) above.
<Answer
>
<Answer
>
<Answer
19 Margin in a futures contract depends on the price volatility of the
underlying asset. The margin requirement > . can be estimated by calculating:
I.
Average daily absolute change in the value of
futures contract.
II. Average number of transactions of
the futures contract.
III. Standard deviation of the
absolute change in the value of futures contract.
IV.
Coefficient of variation of the absolute change in the value of futures
contract.
(a)
Both (I) and (II) above
(b)
Both (I) and (III) above
(c)
Both (III) and (IV) above
(d)
(I), (III) and (IV) above
(e)
(II), (III) and (IV) above.
<Answer
20 The shares of Supreme Industries Ltd., are trading at Rs.370. Put
options with a strike price of Rs.380 are > . priced at Rs.16. The intrinsic
value and time value of the options respectively are
(a)
Rs. 6, Rs.10
(b)
Rs. 8, Rs. 8
(c)
Rs. 8, Rs.16
(d)
Rs.10, Rs. 6
(e)
Rs.16, Rs.12.
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21 Which of the following options
is/are not in-the-money? |
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Type of option |
Strike
Price (Rs.) |
Market Price (Rs.) |
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A |
Call |
185 |
179 |
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B |
Call |
210 |
225 |
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C |
Call |
315 |
315 |
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D |
Put |
98 |
110 |
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E |
Put |
162 |
148 |
(a)
Only C above
(b)
Both A and E above
(c)
Both B and D above
(d)
Both B and E above
(e)
A, C and D above.
<Answer
>
4
22 Stock of Zenith Ltd. has conversion parity price of Rs.38.50. If the
number of shares on conversion per > . warrant is 28, the bond price is
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(a) |
Rs.1,220.50 |
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(b) |
Rs.1,165.50 |
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(c) |
Rs.1,105.00 |
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(d) |
Rs.1,078.00 |
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(e) |
Rs. 998.00. |
<Answer |
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23 Which of the following
statements is not true with
respect to interest rate theories? |
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. (a)
According to Liquidity Preference Theory, spenders keep a proportion of their
assets as cash balances for maintaining liquidity
(b)
According to this Pure
Expectations Theory, the current term structure of interest rates is determined
by the consensus forecast of future interest rates
(c)
According to the Loanable Funds
Theory, interest rates in different sectors in the economy can be predicted
(d)
According to the Liquidity
Premium Theory, the investors are not indifferent to risk and they charge
higher rates than the expected future rates, if the maturity of the instrument
increases
(e)
According to the Preferred
Habitat Theory, it is a pre-requisite that the liquidity premium should
increase at a uniform rate with maturity.
<Answer
24 Bond A has a 12% coupon and Bond B has an 8% coupon. Both bonds have a
10% YTM and five years to > . maturity. Which of the following statements is most correct?
I.
If market interest rates were to increase, Bond B
would have the greatest decrease in price.
II. If market
interest rates remain unchanged, Bond A's price will be higher one year from
now than it is
today.
III. If market interest rates were to
decrease, Bond A would have the greatest increase in price.
(a)
Only (I) above
(b)
Only (II) above
(c)
Only (III) above
(d)
Both (I) and (III) above
(e)
All (I), (II) and (III) above.
25 Which of the following
principles is/are true with respect
to Real Estate Appraisal?
. I.
According to the Principle of Substitution, a rational owner will try to gain
the maximum out of the resources he has.
II. According
to the Principle of Change, price is function of demand and supply and value of
property
fluctuates with price.
III.
According to the Principle of
Marginal Productivity, the value of any factor of production or component of a
property can add to or lower the value of the asset.
(a)
Only (I) above
(b)
Only (II) above
(c)
Only (III) above
(d)
Both (I) and (II) above
(e)
Both (II) and (III) above.
26
. Which of
the following statements is true
regarding mutual funds?
(a)
The shares of close-ended funds
are redeemable at their NAV
(b)
Open-ended funds can sell
unlimited number of units
(c)
The fund units are sold to the
public at the NAV
(d)
Real estate fund is an open-ended
fund
(e)
Specialized funds carry low risk.
<Answer
>
<Answer
>
5
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27 Consider the following data of
JM Mutual Fund (Income plan):
.
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Particulars |
Rs. in crore |
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Value of investments |
1,737.10 |
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Receivables |
130.30 |
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Accrued income |
43.40 |
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Other current assets |
521.13 |
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Liabilities |
390.85 |
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Accrued
expenses |
86.86 |
If
present NAV of the mutual fund is Rs.12.37 per unit, then number of outstanding
units will be
(a)
147.45 crore
(b)
157.98 crore
(c)
172.02 crore
(d)
221.17 crore
(e)
235.22 crore.
28 Which of the following
statements is true with respect to
the industry life cycle?
. (a) In
the pioneering stage few companies continue to get stronger, both in share of
the market and financially
(b)
In the stabilization stage, many firms are lured
into the industry as a result of profit opportunities
(c)
The pioneering stage is typified
by rapid growth in demand for the output of the industry
(d)
In the expansion stage, as a
large number of firms attempt to capture their share of the market, there
arises a high business mortality rate
(e)
The stabilization phase is typified by reduction in
competition between firms.
29 Who among the following cannot become members of OTCEI?
. (a) Public
Listed Corporates
(b)
Scheduled Banks
(c)
Mutual Funds
(d)
Venture Capital Funds
(e)
Banking Subsidiaries.
30 Which of the following statements is not true with regard to Central Government Dated Securities? . (a) They can be held either in
the form of promissory notes or stock certificates
(b)
The price quotation of these
securities are reported to stock exchange for inclusion in the official
quotations list by the licensed dealers
(c)
Issue of these securities are
handled by RBI
(d)
Payment of interest on these
securities is handled by the commercial banks for a fee
(e)
Discount and Finance House of
India offers two way quote in government securities in the secondary market.
END OF
SECTION A
Section B : Problems/Caselet (50 Marks)
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<Answer
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<Answer
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<Answer
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• This
section consists of questions with serial number 1 – 6.
• Answer
all questions.
• Marks are
indicated against each question.
•
Detailed workings/explanations should form part of
your answer.
• Do not
spend more than 110 - 120 minutes on Section B.
1.
The dividends on the equity
shares of Pioneer Industries Ltd. (PIL) have been experiencing a growth rate of
12% per annum in the recent years, which is considered to be above normal. The
above normal growth rate in dividends is expected to continue for four years
after which the growth rate will reduce to 5% per annum which will continue
indefinitely. The company has recently announced a dividend of Rs.2.00 per
share. The required rate of return on the equity shares is 15%.
You are required to find out the value of the
equity share of PIL.
2. Data for
15-trading days for Group B1 scrips of BSE is given below:
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Day |
Advances |
Declines |
Total no. of issues traded |
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1 |
199 |
451 |
661 |
<Answer
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(10marks)
<Answer
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6
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77 |
581 |
664 |
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3 |
28 |
634 |
665 |
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4 |
473 |
187 |
664 |
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5 |
598 |
63 |
665 |
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6 |
398 |
236 |
648 |
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7 |
296 |
341 |
647 |
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8 |
167 |
465 |
648 |
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9 |
249 |
386 |
649 |
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10 |
342 |
300 |
649 |
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11 |
375 |
255 |
652 |
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12 |
426 |
212 |
652 |
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13 |
316 |
330 |
653 |
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14 |
264 |
374 |
653 |
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15 |
331 |
322 |
666 |
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You are
required to calculate: |
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a. |
Short-period
A-D line. |
marks |
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b. |
Long-period
A-D line. |
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3.
Tetra Pharmaceuticals Ltd., has
recently come out with a partly convertible debentures (PCDs) to part finance
its Rs.20 crore capacity expansion programme. As per the terms of this issue,
12% PCDs of Rs.200 each will be issued at par. The convertible part of the
debenture (Part A) of Rs.100 will be converted into 2 equity shares of face
value Rs.10 after 18 months from the date of allotment. The non convertible
part (Part B) of Rs.100 will be redeemed after 7 years. Interest will be paid
semi annually.
The
following additional information, and projections are available about the
company:
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March 2004 |
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March 2005 |
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March 2006 |
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March 2007 |
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EPS
(Rs.) |
3.50 |
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3.00 |
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3.25 |
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3.40 |
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BONUS
(Ratio) |
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1:3 |
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Month |
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Jan. 2008 |
Apr. 2008 |
July
2008 |
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Sep. 2008 |
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Dec. 2008 |
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Average
P/E Ratio |
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15 |
14.8 |
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14.5 |
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14.0 |
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13.8 |
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<Answer
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Mr.
Rakesh, an investor requires a rate of return of 14% p.a. compounded
semi-annually. |
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You are
required to advise Mr. Rakesh
whether he should subscribe to the issue. |
(12marks) |
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Caselet
Read the caselet carefully and answer the following
questions:
4.
A value of beta explains the risk
associated with a security. With respect to this explain various types of beta
values.
5.
Beta is a good tool for assessing
the movement of stock based on the relationship between the return on the stock
and the market. But there are some problems where only beta is used for
determining risk of an investment. Discuss.
6.
The Beta of a security fails to
correctly reflect the inherent risk during the period of economic slowdown and
recession. Explain.
In the recent market run, there has been a high
level of price volatility. If one has to watch out for the movement of the
stock of the leading scrip then the most common way to measure this is by means
of ‘beta’. Beta is a measure that tells about how much a stock has moved in
relation to the index for a defined period of time. Beta value can be readily
available from the various websites. Ideally the stock should be such, which
can always beat the index. It should rise more when the market are bullish and
falls less when market is in a bearish grip. So, according to the risk taking
ability of the individual, the stock should be selected. A proper strategy
should be framed to invest
7
<Answer
>
( 6 marks)
<Answer
>
( 7 marks)
<Answer
>
( 5 marks)
in a portfolio based on the
stock’s sensitivity to the market index. Investments that carry higher than
average risks should offer the opportunity to earn much higher returns, but in
reality, however, it is not very easy to strategic investments, which adhere to
that principle. There are many variables that affect the stock return; moreover
there is more than one way of calculating risk, thus making risk-reward assessment
a complex exercise. Mostly all variables are based on past data and can provide
little clue about future.
An
analysis of historical beta across sectors does not provide enough evidence to
suggest, that high beta stocks deliver better returns in rising market, or fall
more steeply in falling market. This is primarily because beta values change
rapidly based on market moods. Beta values are useful for positioning a
portfolio based on your risk appetite and buying a stock based on beta alone is
not a good idea. Investors can find the best use of the beta ratio in
short-term decision-making, where price volatility is important. If you are
planning to buy and sell within a short period, beta is a good measure of risk.
However, as a single predictor in long-term investment, the beta has too many
flaws. Careful consideration of a company’s fundamentals will give you a much
better picture of the potential long-term risk. Beta is also useful in reducing
the combined systematic risk of the portfolio. If an investor has a portfolio
of highly volatile stock which had beta greater than 1 during the past one
year, then it make sense to reduce overall portfolio risk by adding defensive
stocks having beta less than 1.
END OF CASELET
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Section C : Applied Theory (20 Marks)
• This
section consists of questions with serial number 7 - 8.
• Answer
all questions.
• Marks are
indicated against each question.
• Do not
spend more than 25 - 30 minutes on Section C.
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7. |
To
cater the need of the different categories of investors globally, various
important services are |
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offered
by the Mutual Funds. Discuss them in brief. |
( 0 |
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8. |
Listing means admission of securities for trading on a
stock exchange. It is done through a formal |
|
|
<Answer> |
|
|
1 |
marks |
||||
|
|
agreement between the stock exchange and the
company. In this context, explain how listing of |
||||
|
|
securities
is advantageous to the company as well as to the investor. |
( 0 |
) |
|
|
END OF SECTION C
END OF QUESTION PAPER
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Suggested Answers
Introduction to Security Analysis
(MB3G1F) : October 2008
Section A : Basic Concepts
Answer Reason
1.
C The growth in the secondary
market can be measured through the movement of < TOP > indices.
Therefore,
option (c) is the correct answer.
2.
D Beta is the slope of the
regression line (characteristic line). Beta measures non-
< TOP > diversifiable risk also known as
systematic risk. Beta indicates the manner in which a security’s return changes
systematically with changes in the market’s return. Beta greater than one is
referred to as an aggressive security.
Therefore,
Option (d) is the correct answer.
8
3. B For
a portfolio consisting of two securities: < TOP >
σ 2P = Variance
= W12
σ12
+ W 22 σ 22 + 2 W1 W2
ρ12 σ1σ2 Given: w1 = w2 = 0.50 (equal proportions)
σ1 = 0
(risk-free security)
∴ σ 2P = 0 +
(0.5)2 σ 22 + 0 =
(0.5σ2)2
∴σ p = Standard deviation of
portfolio = σ2P = 0.5σ2
= Half the standard deviation of the risky security. Therefore, option
(b) is the correct answer.
4.
C The beta of the portfolio
consisting of two securities given that money is allotted equally between the
two assets = 1.1
× 0.5 + 1.2 × 0.5 =
1.15
|
2 |
σ2 |
|
The
systematic risk of a portfolio = β |
m |
|
Substituting
the values, we get |
|
(1.15)2 × 400 = 529(%)2. Hence
the correct answer is (c).
|
5. |
C |
× |
NewMarketValue |
||
|
|
|
||||
|
|
|
OldMarketValue |
|||
|
|
New
Base year Average = Old Base Year Average |
||||
|
|
|
X × |
(2, 500 +150) |
|
|
|
|
|
|
|
||
|
|
1,010 = |
2, 500 |
|
|
|
X =
952.83
Thus, Old
Base Year Average is Rs. 952.83 crore.
Hence,
option (c) is the correct answer.
6.
C
|
Entry |
|
Exit
barriers |
|
|
|
Low |
High |
|
|
barriers |
Low |
Low, stable returns |
Low, risky returns |
|
|
High |
High, stable returns |
High, risky returns |
Therefore,
Option (c) is the correct answer.
7.
E Treatment of research and
development expenditure, gratuity liability and depreciation provision affects
the profit figure of a company and valuation of inventories also affects the
profit and loss account however revaluation of financial investment for treasury
operation only affect the balance sheet and hence (e) is the answer.
<
TOP >
<
TOP >
<
TOP >
<
TOP >
|
8. |
C |
|
|
Bond price-Conversion value |
|
<TOP> |
|
|
|
|
|
|||||
|
|
Premium
over conversion value = |
|
|
Conversion value |
|
||
|
|
|
|
|
|
|
|
|
|
|
Where
conversion value = Current market price of the stock × Conversion rate |
|
|||||
|
|
In the given case, conversion value |
= 66×20 |
=
Rs.1,320 |
|
|||
|
|
|
1, 650 −1, 320 |
|
|
|
||
|
|
Premium
over conversion value = |
|
1, 320 |
= 25%. |
|
|
|
9
9.
D P/S ratio is useful for valuing
companies even with no earnings, viz., no dividends at
< TOP > all.
P/S ratio
can never be negative.
Firms with low profit margins and high P/S ratio are overvalued and
those with high profit margins and low P/S ratios are undervalued.
P/S ratio is not influenced by accounting methods used fro depreciation,
inventory, etc.,
Statements (I) and (IV) are true, and statements (II) and (III) are not
true. Hence (d) is the answer.
10.
D Option (d) describes the
characteristics of the H-model. Two-stage dividend discount
< TOP > model is most suitable to firms
that register high growth and they also expect to maintain this growth rate for
a certain period of time after the growth rate tends to decline.
It is difficult to specify the supernormal growth
period with precision since the growth rate is expected to reduce to stable
level after this period. The model suffers with the limitation of the change of
high supernormal growth to a lower stable growth rate at the end of the
supernormal growth period. The terminal price calculated in this model is
derived from Gordon model and hence it suffers from the limitation of the
Gordon model. This model assumes two-stage i.e. high-growth period and
stable-growth period for valuing a stock.
Therefore,
Option (d) is the correct answer.
11. C Duration = 1/Dividend yield = 1/(5.8/78) =
13.45 years. < TOP >
12.
E For bonds with a shorter term
to maturity, realized yield will be closer to the YTM.
< TOP > Other statements are said to be
false. Hence option (e) is said to be the correct answer.
13. A Post tax yield to maturity = cost of
acquisition (1+r)15 = Post tax redemption value < TOP >
=
480.50(1+r)15 = 97,164.16
=
(1+r)15 = 202.21 = 42.47%
14.
C When mutual fund managers do
not on average make superior returns that means < TOP > using public information any abnormal return is not possible and this
supports semi-strong form of market hypothesis. Hence (d) is not correct. Trend
analysis will be worthless if historical information cannot be used for
superior returns and this also supports semi-strong form of market efficiency.
Hence (b) is not correct. If positive abnormal returns can be expected from low
P/E stock if signifies that publicly available information can be used to gain
abnormal return and this is in against semi-strong form of market efficiency.
However, if no investor can make superior profits
by buying or selling stock after the announcement
of expected rise in dividends it is in accordance with semi-strong form
efficiency rules. According to this for, current stock prices reflect all
publicly available information such as earnings, stock and cash dividends,
interest rate changes etc. And so an investor cannot make superior profits by
changing his portfolio according to the changes in the interest rates. Hence,
statement (e) also supports semi-strong form of market efficiency.
Hence (c)
is correct answer.
15. A Given rM = 8%
< TOP > Expected return on ACC’s stock ,
rACC = 0.15% + 1.2 x 8% = 9.75%
Since the
actual return on ACC’s stock is 7%,
Abnormal return = Actual return – expected return = 7% - 9.75% = -2.75%
Hence (a) is the answer.
16. B
Momentum is used to identify the trend reversal before it takes place.
< TOP > Therefore, Option (b) is the
correct answer.
17. A Volumes
reduce as the symmetrical triangle narrows towards the apex.
< TOP > In a Right angled Triangle, the
resistance or support level is implied in its formation.
Other
statements are true with respect to triangles.
Therefore,
Option (a) is the answer.
10
18.
D The difference between two
futures prices is known as spread. The inter commodity
< TOP > and intra commodity spreads
require lower margin vis-à-vis single contracts. The
logic behind lower margins is that the prices of
futures contract in a spread are usually related and the initial margin which
is deposited for a spread covers both the contract of the spread. As a result,
the risk of spread is quite low as compared to the risk of a single contract.
Basis = Current cash price – Futures price. Generally basis is higher for
futures contract with longer maturity. Hence (I), (II) and (IV) are correct and
(III) is not correct.
19.
B Futures margin depend on the
price volatility of the underlying asset. Exchanges
< TOP > generally set this margin equal
to µ + 3
σ then µ is the
average daily absolute change
in the value of contract and σ is
standard deviation of these changes over a period of time. Hence only (I) and
(III) are correct and therefore (b) is the answer.
20. D
Intrinsic value = Rs.380 – Rs.370 = Rs.10 < TOP > Time value = Rs.16 – Rs.10 = Rs.6
21.
E A call option is said to be
in-the-money, if the market price of the underlying asset is
< TOP > greater than the strike price. A
put option is said to be in the money, if the strike price
is greater than the market price of the underlying asset. So except B and
E, all are not in the money and the answer is (e).
22. D Conversion parity price = Bond
Price/Number of shares on conversion per warrant < TOP >
38.50 =
x/28
x = Rs.
1078.00
23.
E According to Liquidity
Preference Theory, spenders keep a proportion of their assets
< TOP > as cash balances for maintaining
liquidity.
According to this Pure Expectations Theory, the
current term structure of interest rates is determined by the consensus
forecast of future interest rates.
According to the loanable funds theory, interest
rates in different sectors in the economy can be predicted as the theory
focuses on the demand and supply aspects of the funds in an economy with
different sectors like the household sector, the business sector and the
government sector.
According to the Liquidity Premium Theory, the
investors are not indifferent to risk and they charge higher rates than the
expected future rates, if the maturity of the instrument increases.
According to the Preferred Habitat Theory, it is
not necessary that the liquidity premium should increase at a uniform rate with
maturity.
Statements (a), (b), (c), and (d) are true, and
statement (e) is not true. Hence (e) is the answer.
24.
A If market interest rates were
to change, Bond B would have the greatest change in
< TOP > price because smaller coupon
bonds will change more than the higher coupon bonds. Hence, (I) is correct and
III is incorrect. Bond A is a premium bond and hence its
price
decreases as it reaches maturity. Hence II is incorrect and the answer is (a).
25.
E According to the Principle of
Highest and Best Use, a rational owner will try to gain
< TOP > the maximum out of the resources
he has.
According to the Principle of Change, price is function of demand and
supply and value of property fluctuates with price.
According to the Principle of Marginal Productivity, the value of any
factor of production or component of a property can add to or lower the value
of the asset.
According to the Principle of Substitution, a rational buyer will not
spend more than the amount it is going to cost him if he buys similar property
with same utility.
Hence (e)
is the answer.
11
26.
B The shares of close-ended funds
are not redeemable at their NAV, but these shares are
< TOP > traded in the secondary market
at stock exchanges at market prices that may be above
or below
their NAV.
Open-ended
funds can sell unlimited number of shares and keep their fund growing.
The fund
units are sold to the public at the Public Offering Price (POP).
Real
estate fund is of close-ended type.
Specialized funds envisage to specialize investment
in securities of firms of certain industries or specific income producing
securities. Such funds carry more risk for lack of diversification approach.
Hence (b)
is the answer.
|
27. |
B |
|
|
Value of Investments + Receivables + Accrued Income |
|
<TOP> |
||||
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|||||||
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|
|
+ Other current Assets − Liabilities − Accrued expenses |
|
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|
|||
|
|
NAV |
= |
|
|
|
Number of outstanding units |
|
|
||
|
|
|
|
|
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||
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|
1737.10 +130.30 + 43.40 + 521.13 − 390.85 − 86.86 |
|
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|||||
|
|
12.37 |
= |
|
Number
of outstanding units in crore (N o ) |
|
|
|
|||
|
|
|
|
1954.22 |
|
|
|
|
|
||
|
|
No |
= |
|
12.37 |
|
=
157.98 crore. |
|
|
||
|
28. |
C (a)
Is not |
correct
in |
as
pioneering stage not few but many firms are |
level
into |
<TOP> |
|||||
industry
as a result of profit opportunity.
(b)
Is not correct as in stabilization
stage few companies continue to get stronger, both in share in share of market
and financially.
(c)
The pioneering stage is typified
by rapid growth in demand for the output of the industry.
(d)
Is not correct as it is not the
expansion stage but the pioneering stage where a large number of firms attempt
to capture their share of the market, there arises a high business mortality
rate.
(e)
Is not correct as stabilization
phase is typified by increase competition between firms.
Hence (c)
is the answer.
29. A The following can become members of OTCEI: < TOP >
•
Public financial institutions
•
Scheduled banks
•
Mutual funds
•
Venture capital funds and venture capital companies
•
NBFCs
•
Banking subsidiaries.
•
All the above can become members
of OTCEI by fulfilling the eligibility norms laid down by OTCEI such as
network, approval of SEBI, infrastructure, standing and experience, etc.,
Hence (a)
is the answer.
30.
D All statements are correct
except option (d). The RBI handles payment of interest on
< TOP > these securities.
Therefore,
option (d) is the correct answer.
Section B : Problems
|
1.Dividend stream during the
period of abnormal growth: |
< |
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||||
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|
D1 |
= |
2.00 |
(1.12) |
TOP |
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||
|
D2 |
= |
2.00 |
(1.12)2 |
|
> |
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|||||
|
D3 |
= |
2.00 |
(1.12)3 |
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|
D4 |
= |
2.00 |
(1.12)4 |
|
|
|
|
Present
value of the dividends payable during the period of above-normal growth
12
|
|
2(1.12) |
+ |
2(1.12) |
2 |
+ |
2(1.12)3 |
+ |
2(1.12)4 |
|
||
|
= |
1.15 |
(1.15)2 |
(1.15)3 |
(1.15) |
4 |
=
Rs.7.49 |
|||||
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Value of
the share at the end of 4 years (Value at normal growth in dividends)
|
|
2(1.12)4 (1.05) |
|
|
= |
0.15 − 0.05 |
=
Rs.33.044 |
Present
value of the share at the normal growth rate
33.044
=
(1.15) 4 = Rs.18.89
Value of
the share = 7.49 + 18.89 = Rs.26.38.
2.a. Short-period
A-D line:
For
short-period observations A-D lines do not account for unchanged stocks:
<
TOP
>
|
Day |
Issues traded |
Advances |
Declines |
Net (A-D) |
|
1 |
661 |
199 |
451 |
-252 |
|
2 |
664 |
77 |
581 |
-504 |
|
3 |
665 |
28 |
634 |
-606 |
|
4 |
664 |
473 |
187 |
286 |
|
5 |
665 |
598 |
63 |
535 |
|
6 |
648 |
398 |
236 |
162 |
|
7 |
647 |
296 |
341 |
-45 |
|
8 |
648 |
167 |
465 |
-298 |
|
9 |
649 |
249 |
386 |
-137 |
|
10 |
649 |
342 |
300 |
42 |
|
11 |
652 |
375 |
255 |
120 |
|
12 |
652 |
426 |
212 |
214 |
|
13 |
653 |
316 |
330 |
-14 |
|
14 |
653 |
264 |
374 |
-110 |
|
15 |
666 |
331 |
322 |
9 |
Cumulative (A-D)
-252
-756
-1362
-1076
-541
-379
-424
-722
-859
-817
-697
-483
-497
-607
-598
The statistics indicate that over a period of 15-days, the number of
stocks gone down is more than the number of stocks gone up. So,it is assumed
that the market is still in the bearish grip.
b.
Long-period A-D line:
For long
period observations, the A-D line is drawn after considering those stocks also
whose price
remain unaltered. The A-D line is drawn by
accumulating the value of A/U-D/U .
|
|
Issues |
Adv - |
|
Un - |
(2)/(4) × |
(3)/(4) × |
|
|
Cumulativ |
|
|
traded |
ances |
Declines |
changed |
100 |
(5)-(6) |
(5) − (6) (8) |
e (A – D) |
|
|
Days |
(1) |
(2) |
(3) |
(4) |
100 (5) |
(6) |
(7) |
(9) |
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1 |
661 |
199 |
451 |
11 |
1809.09 |
4100.00 |
-2290.91 |
-47.86 |
-47.86 |
|
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|
2 |
664 |
77 |
581 |
6 |
1283.33 |
9683.33 |
-8400.00 |
-91.65 |
-139.51 |
|
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|
3 |
665 |
28 |
634 |
3 |
933.33 |
21133.33 |
-20200.00 |
-142.13 |
-281.64 |
|
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|
4 |
664 |
473 |
187 |
4 |
11825.00 |
4675.00 |
7150.00 |
84.56 |
-197.08 |
|
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5 |
665 |
598 |
63 |
4 |
14950.00 |
1575.00 |
13375.00 |
115.65 |
-81.43 |
|
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|
6 |
648 |
398 |
236 |
14 |
2842.86 |
1685.71 |
1157.14 |
34.02 |
-47.41 |
|
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|
7 |
647 |
296 |
341 |
10 |
2960.00 |
3410.00 |
-450.00 |
-21.21 |
-68.63 |
|
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|
8 |
648 |
167 |
465 |
16 |
1043.75 |
2906.25 |
-1862.50 |
-43.16 |
-111.78 |
|
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|
9 |
649 |
249 |
386 |
14 |
1778.57 |
2757.14 |
-978.57 |
-31.28 |
-143.07 |
|
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|
10 |
649 |
342 |
300 |
7 |
4885.71 |
4285.71 |
600.00 |
24.49 |
-118.57 |
|
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|
11 |
652 |
375 |
255 |
22 |
1704.55 |
1159.09 |
545.45 |
23.35 |
-95.22 |
|
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|
12 |
652 |
426 |
212 |
14 |
3042.86 |
1514.29 |
1528.57 |
39.10 |
-56.12 |
|
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|
|
|
|
|
|
|
|
13 |
653 |
316 |
330 |
7 |
4514.29 |
4714.29 |
-200.00 |
-14.14 |
-70.26 |
|
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|
|
|
|
|
|
|
|
|
|
14 |
653 |
264 |
374 |
15 |
1760.00 |
2493.33 |
-733.33 |
-27.08 |
-97.34 |
|
|
|
|
|
|
|
|
|
|
|
|
15 |
666 |
331 |
322 |
13 |
2546.15 |
2476.92 |
69.23 |
8.32 |
-89.02 |
|
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|
|
|
|
|
|
|
|
|
13
Since there is no significant change in number of unchanged issues, we
can conclude that there is no sign of trend reversal.
|
3.The intrinsic value of the
above PCD is calculated as under: |
< |
|
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||
|
|
|
|
|
|
|
|
Present value of interest payments |
TOP |
|
|||
|
= 12 |
× PVIFA (7%, 3) + 6 × PVIFA
(7%, 11) × PVIF(7%, 3) |
> |
|
|
|
|
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|
||
|
= 12 |
× 2.6243 + 6 × 7.4987
× 0.8163 = 68.2186 |
|
|
|
|
≅ 68.22.
----------------(I)
|
|
|
|
Year Ended |
|
2004 |
2005 |
2006 |
2007 |
|||||
|
|
Bonus adjusted EPS (Rs.) |
|
3.50 |
4.00 |
4.33 |
4.53 |
|||||||
|
Growth
rate (g) implicit in the bonus adjusted EPS can be obtained from the equation |
|
||||||||||||
|
3.5 (1
+ g)3 = 4.53 |
|
|
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|
|||||||||
|
|
4.53 |
3 |
|
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||||||
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|
−1 |
|
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||||||
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|
|||||||||
|
⇒ g = |
3.5 |
=
0.0898 i.e. 8.98% |
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|||||||
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|
|
+ |
0.0898 |
|
|
||||||||
|
3.4 1 |
|
|
|
||||||||||
|
3 |
|
||||||||||||
|
Projected
EPS in July, 2003 = |
|
|
= Rs.3.50 |
|
|||||||||
|
|||||||||||||
Average
P/E ratio between January 2003 to July 2003 (6 months period prior to
conversion)
|
|
15.0 +14.8
+14.5 |
|
|
= |
3 |
=
14.77. |
Therefore, projected market price of share after 18 months = 3.50
× 14.77 = Rs.51.70 Present value of market value of conversion after
eighteen months
= 51.70
× 2 × PVIF (7%, 3)
= 103.40
× 0.8163 = Rs.84.41 -------------------(II)
Present
value of non-convertible portion redeemed after 7 years
= 100
× PVIF (7%, 14)
= 38.78.
------------------(III)
Intrinsic
value of the PCD = I + II + III
= 62.88 +
84.41 + 38.78
= Rs.191.41
Therefore, it is recommended not to invest in the proposed PCD as it is
just rightly priced whereas the projected declining P/E ratio may take the
price of convertible portion further down.
4.The
various types of beta values are as under: <
Negative beta - A beta less than 0 - which would indicate an inverse relation to the
market - is possible butTOP> highly unlikely. Some investors used to believe that gold and gold
stocks should have negative betas because they tended to do better when the
stock market declined, but this hasn't proved to be true over the long term.
Beta of 0 - Basically, cash has a beta of 0. In other words, regardless of which
way the market moves, the value of cash remains unchanged (given no inflation).
Beta between 0 and 1 - Companies with volatilities lower than the market have a beta of less
than 1 (but more than 0).
Beta of 1 - A beta of 1 represents the volatility of the given index used to
represent the overall market, against which other stocks and their betas are
measured.
Beta greater than 1 - This denotes a volatility that is greater than the broad-based index.
Technology companies on the Nifty have a beta higher than 1.
5.Beta seems to be good measure for
determining risk of an investment but there are some problems with <
relying on beta scores alone. TOP
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• Beta
looks backward and history is not always an accurate predictor of the future. >
• Beta also doesn’t account for changes that are in the works, such as new
lines of business or industry shifts.
• The stocks, which have substantial weight in the portfolio, may result
in a lower beta implying that the risk is very low and the other stocks may
result in a higher beta implying that the stocks are risky. Thus the accuracy
of the beta estimate is based on the right index chosen.
• Beta suggests a stock’s price volatility relative to the whole market, but
that volatility can be upward as well as downward movement. In a sustained
advancing market, a stock that is outperforming the whole market would have a
beta greater than 1.
• Before estimating the beta one needs to decide the time horizon over
which the regression has to be made. If only few observations are made then the
estimate may not reflect the true beta.
• Accuracy of the beta also depends on the time interval over which the
returns are computed. The interval should be chosen based on the trading cycle
of the user i.e. if the trading cycle is daily it is better to have monthly
returns for regression otherwise results may not be truly reflecting the
changes.
6.If we consider the general economic cycle it will be like slowdown in
the economy, a recession, revival in the < economic activity followed by and economic boom and then slowdown. If
we observe the economic activityTOP during each of these phases we find that each one is a distinct phase.
The characteristics of slowdown in the > economy are different from that of economic recession and the
characteristics of recession are different from the characteristics of the
revival in the economy. That is, any parameter computed in one phase may not be
applicable to study the characteristics of any other phase. Similar is the
problem with Beta also. A Beta computed during periods of recession is not
applicable during the periods of boom or during the periods of economic
revival. It has to be adjusted properly in order to reflect he characteristics
of the period under study. Therefore, beta which denotes the systematic risk or
undiversified risk component computed in some other period fails to reflect
correctly the associated risk of a stock during periods of economic slowdown
and recession.
Section C: Applied Theory
7. MUTUAL FUND SERVICES < TOP >
Financial Mutual Funds, to cater to the need of the
different categories of investors, launch schemes involving services to the
investors. These are special services in addition to the returns which Mutual
Funds offer to the investors, these services are vulnerable to. investors and
attract them to invest their savings in those Mutual Funds which have such
plans to meet their various needs, for example, regular income plan, savings
and reinvestment plans, health insurance schemes, equity-linked savings plans
for tax exemption purposes, etc.
Some of
the important services offered by Mutual Funds globally are discussed below:
Saving Scheme
This is one of the inherent objectives of investors
to accumulate their savings, voluntary saving plan can be added to Mutual Funds
through which an investor can save on monthly or quarterly basis and thus the
amount so saved will be added to purchase the units in the Mutual Funds.
The
important features of such plans are,
a.
Savings could be made through
voluntary saving plans which are at the option and free will of the investor to
contribute any sum at any time on regular or irregular basis.
b.
Alternatively, savings could be
made through contractual saving plans pursuant to some agreement envisaging a
long-term investment plan binding upon the investor.
In the USA, these plans are quite in vogue and are
under regulation of Securities Exchange Commission. These plans charge
investors with substantially high front-end loads. An investor is required to
pay commissions over the life of the contract which are recovered in advance in
the initial year of the contract from initial installments in the form of
front-end loads.
c.
The investors who drop out from
the contractual plans as stated in (b) above remain at a disadvantage as the
prepaid commission is not refunded to them. Securities Exchange Commission has
made rules requiring Mutual Funds to refund the full amount of prepaid
commission to investors if the investor cancels the plan within 45 days and 85%
of the amount, if the investor cancels within 18 months of joining the saving
plan. Those who cancel the commitment after 18 months get no refund.
Automatic Reinvestment Plan
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The UTI, in India, has also
started this plan where like in the USA, the amount of dividend and other
income accrued on mutual fund investments is automatically reinvested in
purchasing additional units or shares in the open-ended funds. Other Mutual
Funds in the public sector have followed suit.
Regular Income Plan
Systematic withdrawal is allowed to investors of
their money locked in mutual fund investments in the form of regular income by
way of monthly or quarterly installments to meet their regular financial needs.
Initial investment in such plans is stipulated which carries interest at the
specified rate. The repayment installments are so formulated as to pay out the
earnings first and then the principal amount.
Shifting Advantage or Conversion Privileges
Many mutual fund companies offer different investment
plans for investors and many provide the facility to investors within the
family of the plans to shift or convert or exchange them afterwards from one
plan to another at nominal costs or at no costs subject to tax advantages, if
any, available to the investors.
Retirement Pension Plans
Mutual Funds are now very much linked with
retirement pension plans. They facilitate setting up by individuals and
companies, the tax deferred retirement plans for self or their employees
respectively. Regular monthly income plans in India offered by UTI and other
Mutual Funds established by nationalized banks are alike.
Insurance Plan
Mutual Funds offer in the USA a relatively new
service in the form of insurance program that protects an investment in mutual
fund against a long-term loss. The insurance cover is available for a period
ranging from 10 to 15 years, for the amounts ranging from $3,000 to $2,00,000
at a premium of about 6% of the insured sum for a period of 10 years. In dollar
terms the insurance of a sum of $1,00,000 will cost $600 for a period of 10
years. One has to assess the loss on the insured sum. In the case of capital
loss accruing $10,000 then this loss will be completely met by insurance
company to cover up the insurance sum of $1,00,000.
LIC Mutual Fund and UTI have come out with schemes
providing life insurance covers to the investors.
Cheque-writing Facilities
In the USA, all Mutual Funds offer to the investors
the facility of drawing cheques on the Mutual Funds to draw the money invested
in Mutual Funds. These cheques are drawn and paid through the funds' banks.
This service is rendered frequently by all the Mutual Funds in the USA, In
India, Mutual Funds have yet to conceive such novel and innovative schemes.
To conclude, real service to investors is done by
Mutual Funds by offering the schemes which directly offer income, capital gains
and solutions to their personal individual problems. For this purpose, Mutual
Funds should maintain marketing research wing which should always remain on
toes looking for new opportunities and conceiving innovative schemes to meet
the other conceptual needs of the investors than income and gains in money
terms.
8. Advantages of Listing < TOP >
Listing of securities on the stock exchanges is advantageous to the
company as well as to the investors as seen hereunder:
a.
To the
Company
i.
The company enjoys concessions
under Direct Tax Laws - In such companies the public is substantially
interested resulting in lower rate of income tax payable by them;
ii.
The company gains national and
international importance by its share value quoted on the stock exchanges;
iii.
Financial institutions/bankers
extend term loan facilities in the form of rupee currency and foreign currency
loan;
iv.
It helps the company to mobilize
resources from the shareholders through ‘Rights Issue’ for programs of
expansion and modernization without depending on the financial institutions in
line with the government policies;
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v.
It ensures wide distribution of
shareholding thus avoiding fears of easy takeover of the organization by
others.
b.
To the
Investors
i.
Since the securities are
officially traded, liquidity of investment by the investors is well ensured;
ii.
Rights entitlement in respect of further issues can
be disposed of in the market;
iii. Listed
securities are well preferred by bankers for extending loan facility;
iv.
Official quotations of the
securities on the stock exchanges corroborate the valuation taken by the
investors for purposes of tax assessments under Income Tax Act, Wealth Tax Act,
etc.;
v.
Since securities are quoted,
there is no secrecy of the price realization of securities sold by the
investors;
vi.
The rules of the stock exchange
protect the interest of the investors in respect of their holdings;
vii.
Listed companies are obligated to
furnish unaudited financial results on a half-yearly basis within two months of
the expiry of the period. The said details enable the investing public to
appreciate the financial results of the company in between the financial year;
viii.
Takeover offers concerning listed
companies are to be announced to the public. This will enable the investing
public to exercise its discretion on such matters.
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