International College of Financial Planning

Investment Planning Workbook 1. Mr. X buys 50 TISCO October Rs. 350/- call options for Rs.15. The current share

price is Rs.345/-. The breakeven share price, ignoring transaction cost is Rs.____? a. 350 b. 360 c. 365 d. None

Solution: C

2. If a bond is selling at a premium ____ a. It’s an attractive investment b. It’s coupon rate is below market rate c. It’s current yield is lower than the coupon rate d. It’s realized compound yield will be less than the yields to maturity

Solution: C

3. A portfolio manager can hedge a share portfolio by, a. Buying call options b. Selling call options c. Buying Index options d. Selling Put options

Solution: B

4. Which of the following is not a characteristic of a balance fund? a. It is less risky than growth funds b. It is more risky than income funds c. It must invest in both equity & bonds in equal amounts d. It provides both growth & income objectives.

Solution: C

5. The best method of valuing a share is_____ a. Book value based on net tangible assets b. Present value of all the dividends to be received from holding that

share c. Liquidation value based on the proceeds of liquidation of the

company d. Apply the P/E ratio to expected earnings per share.

Solution: C

6. Tata power is raising funds through a bond issuance to fund a new power plant at Noida UP. They are issuing two year maturity, Zero coupon bond with face value = 1000, yield = 4%. What price would you pay for this Tata power zero coupon bond today?

a. 920 b. 924.56 c. 925.95 d. 960

Solution: B Working: FV = 1000, N = 2, I =4%, find PV = 924.56

7. The CAPM is a model that___ a. Determines the geometric return of a security b. Determines time weighted return c. Explain return in terms of risk d. Explains systematic risk

Solution: C

8. Market Efficiency means a. that the investor can predict prices b. That the prices are set relative to current information c. That the prices are set randomly. d. Actual returns equals expected return

1. all statements are false 2. all statements are true 3. Only B is true. 4. none of the above

Solution: 3

9. Functions of SEBI are: a. Regulate the securities market b. Promoting the development of the securities market c. Protecting the interests of Investors in Securities d. Regulating banking and Money Market activities.

1. All statements are true 2. All statements are false 3. A, B & C are true while D is False. 4. A, C & D are true while B is false.

Solution: 3

10. The stock Market ___

a. Exists in any country primarily for the purpose of assisting corporate & Government to raise the capital they need to fund their operations

b. Is an ever visible barometer of a nation’s economic vitality. c. Is an efficient allocator of scarce capital resources from the net

savers – individuals & institutions to net users of the savings mainly companies.

1. Only A & C Is true 2. Only A & B is true 3. All statements are false 4. All statements are true.

Solution: 4

11. The activities of the stock exchange are regulated by a. RBI b. SEBI c. SBI d. None of the above

Solution: B

12. ___ is the oldest exchange in the country & also in ASIA. a. BSE b. NSE c. MCX d. CBOE

Solution: A

13. Cheque writing facility is usually offered by ___ a. MMF’s & other liquid schemes of short duration b. Index funds c. None of the above

Solution: A

14. _____ is a highly liquid, low risk asset. a. Cash b. Property c. Equity d. Don’t know

Solution: A

15. A 10% semi annual bond with YTM of 12% & 10 years to maturity has a price equal to _______

a. 1051.65 b. 1159.88

c. 888.89 d. 885.30

Solution: D Working: FV = 1000, N = 10 X 2, I = 12% / 2, pmt = 50, find PV = 885.30

16. Three securities 1, 2 & 3 has the following data: (wt) probability of security std deviation co. coeff 0.3 6% 0.4 R12 0.5 9% 0.6 R13 0.2 10% 0.7 R23

Calculate standard deviation of portfolio return. a. 7% b. 8.25% c. 7.13% d. 6.58%

Solution: C

17. Following are the closing quotes in Rs. of script in market for 10 days. Day quote

1 145 2 143 3 148 4 150 5 151 6 152 7 155 8 154 9 153 10 149

Calculate standard deviation of the time series a. 2.85 b. 7.05 c. 13.4 d. 3.66

Solution: D

18. A expected return = 20%, B expected return = 10%, C expected return = 12%, D expected return = 9%. You invest 40,000/-. What more information is needed to find the holding period return of each of the companies of the portfolio.

a. Proportion of investments b. Beta of the shares c. Market value of the investments d. None of the above

Solution: A

19. Security weight std deviation co- coeff a. 0.1 5 0.5 AB b. 0.1 10 0.8 AC c. 0.8 15 0.3 BC

Find standard deviation of portfolio. a. 11.76 b. 12.75 c. 14.97 d. 13.82

Solution: B

20. The average PUT option exercise price of HLL is 370. Current share price is Rs. 360. Premium is Rs.15/-. Intrinsic value of the PUT, ignoring transaction cost is ___.

a. Nil b. 5 c. 15 d. 10

Solution: D

21. Santosh has purchased 100 shares of X ltd stock at Rs.60/- with 50% margin required & 35% maintenance margin required. If the stock drops to Rs.40/-. How much money does he have to put up?

a. 0 b. 615 c. 400 d. 600

Solution: A

22. 100000, T bill is selling at 98000 today. It will mature in 60 days. The annual yield is

a. 13.08 b. 13 c. 12.41 d. 13.25

Solution: C Working I = [(fv/pv)-1] x 365/n

23. Equal amount of investment is made in portfolio consisting of securities X & Y. Standard deviation of X is 12.43%, standard deviation of y is 16.54%, Co relation coefficient XY is 0.82. The interactive risk of the portfolio measured by covariance is ______

a. 145.64 b. 156.22 c. 168.59 d. 172.56

Solution C Working 16.54 X 12.43 X 0.82 = 168.59%

24. You are running a dividend yield fund for a leading Mutual Fund house. The most recent dividend of all is fine business services common stock was Rs. 2.35. The dividends are expected to grow at 4% indefinitely. If you are looking at a 12% return how much will you be willing to pay for one share of all is fine business services?

a. 24.79 b. 29.38 c. 29.79 d. 30.55

Solution: D Working = 2.35(1.04) = 30.55 0.12 – 0.04

25. You are an owner of an apartment complex with 300 units each of which can fetch Rs. 1000pm as rentals. The apartment complex has an average occupancy rate of 75%. The expenses for maintaining, up keeping the apartment comes to around 10 lacs per annum. Based on the concept of capitalized earning approach & assuming that you require a capitalization rate of 105 how much is the complex worth now?

a. 1.50 cr b. 1.70 cr c. 2 cr d. None

Solution B

26. An Option that can be exercised anytime up till expiry is ______ a. European option b. American option c. Arbitrage d. Contango

Solution: B

27. Exploiting price anomalies in the market to make riskless profit is know as _________

a. Contango b. Arbitrage c. Hedging

d. None of the above Solution B

28. _____ is protecting the value of an asset or portfolio of assets against price fluctuations

a. Hedging b. Arbitrage c. Contango d. None of the above

Solution: A

29. The normal relationship between forwards & futures price and spot prices is ______

a. Contango b. Hedging c. Arbitrage d. None of the above

30. ____ Option can be exercised at expiry only but not before.

a. American option b. European option c. Indian option d. None

Solution: B

31. _______ is the process of transferring ownership rights of derivatives from an individual who owns the underlying asset to the clearing house.

a. Contango b. Novation c. Margins d. Nil

Solution: B

32. _____ is the full price of the put or call option a. Premium b. Strike price c. Spot price d. Time Value

Solution: A

33. ______ is the current price of an asset a. Premium b. Strike price

c. Spot price d. Time Value

Solution: C

34. Strategic options position of buying or selling both Calls & Puts on the same underlying assets is _____

a. Put-Call Parity b. Straddle c. Protective Put d. Naked Call

Solution: B

35. The value of an option if it were to expire immediately______. a. Time value b. Intrinsic value c. None

Solution: B

36. The excess of the market price of any option over its intrinsic value is called the _______ of the option.

a. Time value b. Intrinsic value c. None

Solution: A

37. _______ is an option strategy that limits the values of a portfolio within two bounds

a. Spread b. Straddle c. Protective put d. Collar

Solution: D

38. ____ is an option strategy combining two or more Call options or two or more Puts on the same stock with differing exercise prices or times to maturity.

a. Spread b. Straddle c. Protective put d. Collar

Solution: A

39. (A) Fundamental Analysis looks at matters like future earnings & dividends to assess intrinsic value.

(B) Technical analysis involves a study of past prices & volumes to determine the direction of price movement

a. Only A is true b. Only B is true c. Both A & B are true d. Both A & B are false.

Solution: C

40. Mutual Funds value their investments on a __________ basis on the valuation date.

a. Mark to Margin basis b. Mark to market basis c. Mark to money basis d. Nil

Solution: B

41. ______ is a highly liquid, low risk asset. a. Cash b. Fixed deposit c. Gold d. Shares

Solution: A

42. Spot value of Nifty is 2140; an investor buys a one month nifty 2157 call option for a premium of Rs.7. The option is _____

a. In the money b. At the money c. Out of the money d. None of the above

Solution: C Call = S – (E +P) = 2140 – 2164 = - 24; negative cash flow therefore out of the money.

43. A call option at a strike of Rs.176/- is selling at a premium of Rs. 18/-. At what price will it breakeven for the buyer of the option.

a. 196 b. 204 c. 187 d. 194

Solution: D Breakeven at 176 + 18 = 194

44. Typically option premium is ___

a. Less than the sum of intrinsic value & time value b. Greater than the sum if intrinsic value & time value c. Equal to the sum of intrinsic value & time value. d. Independent of intrinsic value & time value.

Solution: C

45. a stock is currently selling at Rs. 70/-. The call option to buy the stock at Rs. 65 is 9. What is the time value of the option?

a. 4 b. 5 c. 3 d. 2

Solution: A P = IV + TV TV = P – IV = 9 – (70 – 65) = 4

46. A stock currently sells at 120, the put option to sell the stock sells at Rs. 134/- cost Rs18/-. The time value of the option is ___

a. 18 b. 4 c. 14 d. 12

Solution: B

47. Anand is bullish about the index. Spot nifty stands at 2200. He decides to buy one 3 month nifty call option contract with a strike of 2260 at a premium of Rs.15/- per call. Three months later, the index closes at 2295. His payoff on the position is ____. (contract size = 100)

a. 4000 b. 9000 c. 2000 d. None of the above

Solution C Working: Expiration price = 2295 Less Strike price = 2260 Option value = 35 Less premium = 15 20 x 100 =2000

48. Chetan is bullish about the index. Spot nifty stands at 2200. He decides to buy one 3 months nifty call option contract with a strike of 2260 at Rs. 60

a call. 3 months later the index closes at 2240. His payoff on the position is _____ .( contract size = 100)

a. -7000 b. -12000 c. -4000 d. -6000

Solution: D Working: Expiration price = 2240 Less stike price = 2260 - 20 As there is a negative cash flow ie. Out of the money therefore will not exercise and only loses the premium. = -60 X 100 = - 6000

49. _____ are new ordinary shares issued to existing shareholders in some proportion to the number of existing shares held.

a. Preference shares b. Rights issue c. Bonus Issue d. Warrants

Solution: C 50. Security X & Y in ratio of 70 :30, the expected rate of return with their

probability of occurrence is Security X returns Probability Security y returns Probability

40% 10% 40% 40% 30% 20% 30% 30% 20% 30% 20% 20% 10% 40% 10% 10%

Calculate Average return of portfolio a. 25 b. 23 c. 30 d. 20

Solution: B

51. Security weight std deviation co- coeff a. 0.2 7 0.5 AB b. 0.6 20 0.6 AC c. 0.2 5 0.7 BC

Find standard deviation of portfolio. a. 12.64% b. 12.75% c. 14.58% d. 13.50%

Solution: D

52. Security ‘A’ has an average rate of return of 12% with standard deviation of 3%. Return on risk free government security is 6%. Its risk adjusted return is ___

a. 4.55 b. 4 c. 3 d. 2

Solution: D Working = 12 – 6 = 2

3

53. An investor bought 60 call option at 4 and simultaneously sold a 70 call at 2. What is the breakeven price?

a. 66 b. 64 c. 60 d. 62

Solution: D

54. Equal amount of investment in X & Y. Standard deviation X = 12.43, Standard deviation y = 16.54, correlation coefficient xy = 0.82. Interactive risk of the portfolio measured by covariance is_____

a. 168.59 b. 156.22 c. 172.56 d. 145.64

Solution: A

55. You invest in 4 securities. Company A has an expected return of 20%, company B has expected return of 10%, company C = 12%, & company D = 9%. You invest 40000/- . Assume portfolio is equally weighted. What is the return on portfolio?

a. 12.75% b. 23.1% c. 11.79% d. None of the above

Solution: A

56. The august call option exercise price of HLL is 370. The current share price is 360. The premium is 15 rs. The intrinsic value of the call, ignoring transaction cost is____.

a. 10

b. 5 c. Nil d. 15

Solution: C

57. suppose you invest in 4 securities A= 20%, B =10%, C = 12%, D =9%. Investment amount Rs.40000/- What information is needed to find return on portfolio?

a. Proportion of investment’ b. Beta of share c. Market value of investment d. None of the above

Solution: A

58. You own 3 scripts with their market value at Start of year end of year (3rd) total growth.

X 200000 245000 22.5% Y 300000 375000 25% Z 500000 430000 (14.0%) Calculate the CAGR of portfolio.

a. 5% b. 10.26% c. 1.64% d. 11.16%

Solution: C

59. weights X = 70% Y = 30% Average return = 20%, 30%

Standard deviation 10%, 10% COV xy 16% Calculate the portfolio risk.

a. 4.6 b. Nil c. 8.04 d. 9.35

Solution: C

60. Bond of face value 1000, coupon = 10%, n = 5 years, makes half yearly payment. The bond is priced at 1081.10. Calculate the YTM of the bond

a. 8 b. 9 c. 7 d. 10

Solution: A

61. You are a owner of a plot with 120 unit. Each fetch Rs.750pm rental. Average occupancy rate is 80%. Expenditure for maintenance is 3lakhs per annum. Use concept of capital earning approximately and assume that you require a capitalization rate of 12%. How much is the complex worth.

a. 90 lakhs b. 65 lakhs c. 60 lakhs d. 47 lakhs

Solution: D Working: 120 x 750 x 12 x 0.8 = 864000 – 300000 = 564000/ 12% = 47 lakhs

62. Anil has two mortgage loans. Interest rate and other conditions remaining same, repayment in 15 years & 30 years. Evaluate both EMI’s. Repayment of loan in 15 years instead of 30 years will require?

a. Twice as large as 30 years loan payment b. More than twice as large as 30 years loan repayment c. Half the size of 30 years loan payment d. Less than twice as large as the 30 years loan payment.

Solution: D

63. August Put option exercise price 370, current share price 360, premium 15. Calculate intrinsic value ignoring transaction cost.

a. Nil b. 5 c. 10 d. 15

Solution: C

64. You invest in 4 securities A, B, C, & D with expected returns respectively as 20%, 10%,12%,& 9%. You invest Rs.40000/-. What information would you require for further buying of share___

a. If the company is expected to distribute its large reserves in the near future.

b. If the company is coming out with a fresh issue to finance its expansion.

c. If the company is taking efforts to cut down its expenses d. None.

Solution: D

65. Shankar comes to you for advice. He has a large short term gains in ABC ltd. He has heard rumours that they make the stock price tumble and is concerned about losing his gains. Now due to his tax situation he does not want to realize a taxable gain. Assume no transaction cost. What would you advise?

a. Buy a Put option b. Buy a call option c. Sell a Put option d. Sell a call option

Solution: A

66. Fund Avg Return std deviation beta a. 20 25 1.3 b. 12 16 0.9 c. 15 19 1.1 Market 10 15 1 Risk free rate = 6%

Rank the funds based on Sharpe Ratio best to market. A. bac B. cba C. acb D. abc

Solution: C

67. Mrs. Patel works for post office. She deposits 1000 every birthday. Paid interest 8% from age 20 until she retired. If she had 237941.22 at the retirement age. Compute her retirement age?

a. 55 b. 58 c. 57 d. 59

Solution: B Working: I = 8%, pmt = 1000, FV = 237941.22,. mode = begin, n = ? = 58

68. A bond has face value 1000, coupon rate of 7.5%, the market rate comes down to 6%. If the bond is perpetual the value of the bond is ____?

a. 1200 b. 800 c. 1250 d. 1000

Solution: C Working: 75/6% = 1250

69. 100000 T bill is selling at 98000 today. It will mature in 60 days. The annual yield is__?

a. 13% b. 13.08% c. 13.25% d. 12.41%

Solution: D

70. Name Date Price No. of shares Tisco 10/1/03 175 2000 Telco 16/1/03 156 1500 Grasim 18/3/03 220 1000 Hindalco 16/2/03 340 1000 All the shares have face value of Rs. 10/- On Dec’31

Name Dividend Price Date of Div Tisco 60% 475 8/4/04 Telco 40% 585 12/4/04 Grasim 80% 1315 18/5/04 Hindalco 35% 1545 26/5/04

Sri finds that Beta of all the stocks in his portfolio is high. Average 1.5. What does it mean for his risk & return?

a. The portfolio will be sensitive to market risk & return b. The portfolio will exhibit higher return and risk than the market c. The portfolio will earn a higher risk adjusted return compared to

market d. The portfolio will always earn a rate of return that is higher than

the market. Solution: D

71. Suppose You invest in 4 securities A, B, C, & D with expected returns respectively as 20%, 10%,12%,& 9%. You invest Rs.40000/-. Under what circumstances would you recommend buying the share___

a. If the company is expected to distribute its large reserves in the near future.

b. If the company is coming out with a fresh issue to finance its expansion.

c. If the company is taking efforts to cut down its expenses d. None.

Solution: D

72. Fund Avg Return std deviation beta a. 20 25 1.3 b. 12 16 0.9 c. 15 19 1.1 Market 10 15 1 Risk free rate = 6%

Rank the funds based on Jenson Measure in order of best to worst. 1. CBA 2. ACB

3. ABC 4. BAC

Solution: B

73. Ignore tax & transaction cost. Each contract is equal to 100 shares.

shares Current price Exercise price *Call premium *Put premium 3 months 6months 3 months 6monthsA 52 50 3 4 0.35 1.05 B 40 45 1 1.25 5.5 6 C 35 30 6 6.3 0.45 0.65

* Stands for time to maturity If B’s price is Rs.35, at the maturity, of 6 months option. Determine the value of five 6 months Put contracts at their maturity date.

a. 8200 b. 2000 c. -4000 d. 5700

Solution: B

74. The sponsor of a mutual fund may be compared to _____ a. A director in a company b. The chief executive of a company c. The promoter of a company d. An equity share holder of a company

Solution: C

75. Mutual funds in India are set up as a ____ a. Company b. Trust c. Partnership d. Association of persons

Solution: B

76. The asset management company is appointed by____ a. SEBI b. Unit holders c. Sponsor d. Trustee

Solution: D

77. Mutual Funds are regulated by___ a. RBI

b. AMFI c. SEBI d. NSE

Solution: C

78. Which of the following qualifies as a self regulatory organization? a. SEBI b. RBI c. NSE d. AMFI

Solution: C

79. An NRI holds units in a mutual fund. What should he do with his holding if he takes up a foreign citizenship?

a. He redeems b. He continues c. He transfers the units to his mother, who resides in India. d. None of the above.

Solution: A

80. a close end equity fund has average weekly net assets of Rs. 200 crores. As per SEBI Regulations, the AMC can charge the fund with investment and advisory fees up to____.

a. Rs. 2.25 crores b. Rs. 2 crores c. Rs. 2.5 crores d. Rs. 3 crores

Solution: A Working: 1.25% of 1st 100 crores, & then 1% of the balance.

81. The current market price of a 9% coupon bond, when other bonds of similar maturities pay 11%, will be:

a. Above par b. Below par c. At par d. Will be unrelated to other bonds

Solution: B

82. Yield and price of a bond move in ____ a. Opposite direction b. Together in the same direction c. In an unrelated fashion d. In line with the inflation index

Solution: A

83. A unit of an open ended was purchased when its NAV was Rs. 20. At year end its NAV was Rs. 22. In the interim period, the fund made a distribution of Rs. 4 per unit when its NAV was Rs. 21. What was the simple total return of the fund?

a. 25% b. 30% c. 20% d. 31%

Solution: B

84. What type of portfolio asset mix would you recommend to your 55 year old client who plans to retire at age 58? Choose a portfolio that is the closest match to the investor’s needs.

a. 40% in Equity Schemes & 60% in Balanced funds b. 40% in Equity Schemes & 60% in Debt funds. c. 20% in equity schemes, 20% in liquid funds & 60% in Debt funds. d. 100% in Monthly Income Schemes.

Solution: C

85. Rajiv buys a growth – oriented non dividend paying share for Rs. 200 and 4 years later you sell it for Rs. 350. The CAGR is____

a. 10.3% b. 18.8% c. 75% d. 15%

Solution: D Working ((350/200)^(1/4)) -1 x100 = 15%

86. Hitesh has a portfolio with 23 different equities. The portfolio increased by 20%, beta of 1.50. utilizing the Capital Asset pricing Model compute by what % did the market change?

a. 14% b. 15% c. 17% d. 16.5%

Solution: B Working: 20 = 5 + (Rm -5) 1.5 20 – 5 = 1.5 Rm – 7.5 15 + 7.5 = 1.5 Rm Rm = 22.5/ 1.5 = 15%

87. Pritesh owns a let out house property the net annual value of which is Rs. 200000/- The standard deduction under Sec.24 that is available tp Pritesh in respect of the above income would work out to ___

a. 20000 b. Nil c. 40000 d. 60000

Solution: D Std deduction 30% of Net annual value = 30% x 200000 = 60000/-

88. Any possible occurrence which may have a negative implication can be plotted on a graph with X axis measuring the frequency (low – high) and Y axis measuring the financial impact (low – high). It would not be practical to purchase insurance for events which fall in the high frequency, high impact quadrant because______

a. Such a risk cover would be very expensive b. The best way to cover such a risk would be to alter the functioning

of the business c. Usually this is a business risk, which is rewarded by profit motive d. Such occurrences are so few that no insurer would be offering a

risk cover. Solution: A

89. Can an NRI extend his old PPF account for 5 years after its maturity? a. Yes b. No c. Not specified d. Can’t say

Solution: B

90. The statement “Members shall ensure their conduct does not bring discredit to the Financial Planning Profession’, relates to the FPSB code of Ethics of ___

a. Compliance b. Professionalism c. Fairness d. Integrity

Solution B