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Capital Market and Portfolio
Management
April 2025 Examination
Q1. Mr. A is looking to invest some
of his savings for the future. He has two options: stocks and bonds. He decides
to visit his friend Mr. B, who is an experienced investor, to ask for some
advice. Mr. B said "Think of stocks like owning a piece of a company. When
you buy stocks, you're actually buying a small share of that company. But bonds
are like loans you give to companies or governments. When you buy a bond,
you're lending them money, and they promise to pay you back with interest over
a set period. From investment adviser’s point of view how will you
differentiate stock & bond? (10
Marks)
Ans 1.
Introduction
Investing
is an essential part of financial planning, and understanding different
investment options is crucial for making informed decisions. Among the various
investment avenues, stocks and bonds are two of the most common financial
instruments used by investors to grow wealth. While both serve as vehicles for
investment, they differ fundamentally in terms of ownership, risk, returns, and
overall purpose. Stocks represent equity ownership in a company, offering the
potential for high returns along with higher risks. On the other hand, bonds
are fixed-income securities that act as loans to governments or corporations,
providing stable and predictable returns. From an investment
Q2. John, a new investor, is
interested in putting his money into mutual funds but is worried about the
risk. Suppose you are investing in mutual fund from several years, as a friend
explain the different types of mutual funds that can help John in diversifying
risk. (10 Marks)
Ans 2.
Introduction
Mutual
funds have become one of the most popular investment options for individuals
seeking diversification, professional management, and long-term wealth
creation. For new investors like John, mutual funds provide an opportunity to
invest in a diversified portfolio without requiring extensive market knowledge.
However, concerns about risk are common, and understanding different types of
mutual funds can help mitigate these fears. Mutual funds cater to various
investment objectives, risk tolerances, and time horizons, making them suitable
for a wide range of investors. By selecting the right mix of
Q3a. Alpha takes in to an account
the volatility of an asset & compares its risk adjusted performance to an
already established benchmark index. If portfolio return is 30%, the risk-free
rate is 8%, beta is 1.1, and the benchmark index return is 20% calculate alpha.
(5 Marks)
Ans 3a.
Introduction
Alpha is a crucial
metric in portfolio management that measures an investment’s excess return
relative to a benchmark index. It accounts for the volatility of an asset and
evaluates its risk-adjusted performance. A positive alpha indicates that the
investment has outperformed the market, whereas a negative alpha suggests
underperformance. Investors and fund managers use alpha to assess the effectiveness
of their investment strategies. In this case, we will calculate alpha using the
given data, including portfolio return, risk-
b.
Arbitrage pricing theory helps investors to determine whether an asset is
undervalued or overvalued. On the basis of this information investors can
decide invest or not to invest. Arbitrage Pricing Theory is based on some
assumption describe few of them. (5
Marks)
Ans
3b.
Introduction
Arbitrage Pricing Theory (APT) is an advanced asset pricing
model that helps investors determine whether an asset is undervalued or
overvalued based on various economic factors. Unlike the Capital Asset Pricing
Model (CAPM), APT considers multiple macroeconomic variables affecting stock
prices. The theory assumes that asset returns can be explained by a linear
relationship with multiple risk factors. By identifying
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